Transcript CIA Pension Seminar

CIA Annual Meeting
Assemblée annuelle de l’ICA
June 29 & 30, 2006  Les 29 et 30 juin 2006
Ottawa, Ontario
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
• From Simple to more Complex
– Pooling
– Traditional Retention (aka “Retrospective
Experience rating” or “Unilateral Arrangements”)
– Pure Self-Insurance (aka “Pure ASO”)
– Partial Self-Insurance (aka “ASO/Stop-Loss” or
“Minimum Premium Plan”)
• With Aggregate Stop-Loss
• With Large Amount Pooling
• With both
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Single Goal: Get the lowest possible cost
•Anatomy of Group Insurance Cost
– Cost of claims
– Premium Taxes
– Claims Processing Expenses
– Insurer’s Administration Expenses
– Insurer’s Risk Margin
– Insurer’s Profit Margin
– Broker’s Commission
– Sales/“Special” Sales Taxes (Ont. & Quebec)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Potential Sources of Savings in a Group Plan
– Circumstancial Sources
• Premium lower than expected
due to tight negotiation with Insurer
• Premium based on someone else’s risk
• Irrational Action by Insurer
– Analytical Sources
• Claim cost lower than expected
• Actual expenses lower than expected
• Reduced risk and/or profit margin of Insurer
• Tax loophole (if any)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Single Goal: Get the lowest possible cost
•Different Approaches:
– Let the Insurer take the whole risk
• Maybe because you have no bargaining power
– Your group may be too small
• Or you are concerned with potential bad claims experience
– And you want stable / predicable costs
• Or you try to minimize the Insurer’s margins
– In the estimation of the cost of claims and expenses
– In exchange for the rewards of a potentially good experience
 Fully pooled arrangement
(Try to get the lowest possible premium rates)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Different Approaches:
– Share the risk with the Insurer:
Leave the insurer some margin in exchange for
the possibility of an experience rating refund
• You have bargaining power
• You are more concerned with the risk that the insurer
might benefit from your good experience than with
the risk that the insurer would want to recover a deficit
• You are willing to negotiate with the Insurer over
– Risk margin, Profit margin and Expenses
– Reserves (IBNR, DLR)
 Good old-fashioned retention
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Different Approaches:
– Keep the Whole risk:
Get rid of the Insurer’s insurance margins
• You can save the Risk margin + part of Profit margin
linked to the insurance operations + maybe some taxes
•You have bargaining power
• You are financially strong enough to take the whole risk
• You are sophisticated enough to handle the actuarial
aspects or you have a good consulting actuary
• You need someone to help with the administration
– Can be an insurer or a TPA/TPP
 Pure Self-Insurance
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Different Approaches:
– Get the best of both worlds:
Let the insurer take the hits - Save on recurring costs
• You can save part of Risk margin + part of Profit margin
linked to the insurance operations + maybe some taxes
• You have bargaining power
• You do not want to get hit by large claims (ex. out-ofcountry medical) or by unexpected utilization
– You need a cap on what you will pay
• You need someone to help with the administration
– Can be an insurer or a TPA/TPP
 Partial Self-Insurance
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pooling
– Insurer charges a pre-determined premium
and takes the whole risk
• No retrospective premium adjustment
– No experience refund
– No deficit carry-over
• Total cost is determined at beginning of year
– Assuming no change in insured population within the group
• Next year’s premium is based either on:
– Current year’s experience without deficit recovery, or
– Insurer’s rate manual, or
– Experience of a pool of similar groups
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pooling
– Used for small groups on
• Life, AD&D, LTD, STD, Health, Travel and Dental
– Experience is not credible
– Little bargaining power  No need for Insurer to return
any part of underwriting profit
– Any other approach would be expensive to administer
– Used for large groups on
• AD&D and Travel (often used on Life and LTD)
– Experience is not credible
– Risk of loss > Potential reward for good experience
– Pooling of Life is often partial
(e.g. excess over $50,000 / employee)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pooling
– Can also be used on STD, Health and Dental
for larger group (mostly medium-size)
• New groups if Insurer quotes at a loss
• Other groups where
– E (Underwriting surplus) ≤ 0 on the long run
(because of tight negotiation)
– Insurer’s expenses are very tightly negotiated (cannot be lower)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•“Old-Fashioned” Retention / Unilateral Retention
– Insurer shares an underwriting surplus with client
• Retrospective premium adjustment
– Creation of a Claims Fluctuation Reserve (CFR)
– Experience refund
– Any deficit is charged against the CFR;
remainder is carried over to next period
• Maximum cost is determined at beginning of year
• Next year’s premium is based on:
– Current year’s experience with deficit recovery
• Premium is higher compared with pooled group
– Insurer’s risk margin is higher
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•“Old-Fashioned” Retention / Unilateral Retention
– Used for medium size groups on
• STD, Health and Dental
– Experience is relatively credible
– Some bargaining power  Insurer to return part of U/W profit
– Used for large groups on
• Life, STD, Health and Dental
– Excess of Life amounts over a certain threshold may be pooled
–Used for very large groups on
• Life, STD, Health, Dental and LTD
– Excess of Life amounts over a certain threshold may be pooled
– LTD in excess of 2 years may be pooled
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•“Old-Fashioned” Retention / Unilateral Retention
– Client / Consultant must negotiate over:
• Insurer’s expenses
– Claims Administration
– General Administration
– Risk and profit charges
• INBR Reserves
– Level of reserves
– Often a % of premiums
• DLR Reserves (for disabled employees)
– Waiver of Premium: Basis (what modification of Krieger)
– LTD (what modification of GLTD)
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•“Old-Fashioned” Retention / Unilateral Retention
– Client / Consultant must negotiate over:
• Claims Fluctuation Reserve
– % of U/W surplus that goes into CFR
– Maximum level of CFR
• Interest
– On cash flows
– On IBNR Reserves
– On DLR Reserves (WP and LTD)
– On CFR
•Final Accounting Delay
– To recognize run-off of IBNR reserves
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•“Old-Fashioned” Retention / Unilateral Retention
– WARNING !
• Do mot mix a non-taxable STD or LTD plan with
anything (life, health, dental) for which the Employer
pays any part of the premium
– A deficit in the non-taxable STD or LTD might be offset
by a surplus in a benefit partly funded by the employer
 Offsetting transfer could be considered as an
employer-paid premium
 Tax status of STD / LTD would be jeopardized
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
• Bilateral Retention
– Hybrid between retention and Self-insurance
• Same as Old-Fashioned retention except that any final
deficit (at final accounting date) is repaid by the client
– No need for a Claims Fluctuation Reserve (CFR)
– Insurer’s risk margin is lower
– Insurer’s profit margin is lower
 Because MCCSR is lower
– Experience refund if U/W profit
– Any deficit is carried over until the contract is cancelled
• Other features are same as with Old-Fashioned retention
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Employer keeps the whole risk
• OSFI tolerates self-insurance by Employer
– Group Insurance is an employee benefit
– Employer is expected to be solvent (What if not ?)
• No need for an insurer
– Employer can use a TPA / TPP
– TPA / TPP draws on Employer’s Account
• Actual Cost is known at end of year
– No limit on potential cost  Can hamper Employer’s solvency
– Budgeted Approach is possible (if TPP is an insurer)
» Use theoretical premium as an estimate during year
» Pay any shortfall or collect any surplus at year-end
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Goal is to save on expenses related to insurance
• No insurance
 No risk margin
No MCCSR  No capital locked in less productive investment
 No Alternative cost of capital  Reduced profit margin
 No premium tax outside Quebec, Ontario and Newfoundland
– Employer may forget to hold IBNR reserves
– Chap. 3461 does not apply since not a post-employment
or post-retirement liability
– Still a liability, though
– Employer must hold DLR for STD / LTD
– Chap. 3461 applies
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Used for large groups on
• STD, Health and Dental
– Experience is credible
– Larger employers can absorb fluctuations
– Used for large groups on
• Life (first $10,000)
– Allowed by Income tax Act (but 9% Quebec tax applies !)
–Used for very large groups on LTD
• Remember Eaton’s: not as safe as an insured plan
• Employer must hold reserves for claimants
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Client / Consultant must negotiate over:
• TPA / TPP’s expenses
– Claims Administration
– General Administration
– Profit charge
– Client need help from consultant to set up:
• INBR Reserves
• DLR Reserves (for disabled employees)
– STD
– LTD (what modification of GLTD)
– CICA 3461 Valuation
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Client Incurs Additional (External) Costs
• Increased Audit Costs
– Reserves
– Benefit payments
• Taxable benefits (in Quebec): more complex to calculate
– Calculation generally done by Consultant
• Legal Costs
– Employees who are not satisfied with benefit payments
will sue the Employer
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Pure Self-Insurance
– Tax considerations
• GST applies on TPA / TPP’s charges
• Quebec Sales Tax (7.5%) applies on TPA/TPP’s charges
• Ontario Sales Tax and Quebec’s 9% Tax apply to
claims paid
• Premium taxes apply in Ontario, Quebec and
Newfoundland (2% in ON and QC; 4% in NF)
on claims + expenses
• Quebec’s Compensatory tax (0.35%) also applies on
claims + expenses
• Non taxable self-insured STD or LTD is impossible
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Employer wants the best of both worlds
• Keep the “non-risky” part of the risk
– Self-insure up to X% of Expected Cost
» If X ≤ 100%  sometimes called “Minimum Premium Plan”
» If X ≥ 100%  usually called “ASO / Stop-loss”
– Employer theoretically saves
» Part of Insurer’s Profit Margin
» Part of Insurer’s risk margin
• Maximum Cost is known at beginning of year
– Potential cost is limited to Attachment Point + Stop-Loss premium
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
• Insurer takes the risk of fluctuations
– Charges a Stop-Loss premium
– Needs a higher Risk margin (as % of Stop-Loss premium)
» If Insurer takes the same risk as with an insured plan,
then the risk charge should be the same
(as % of theoretical premium
 higher % of Stop-Loss Premium)
» unless Attachment Point > Theoretical Premium
 Attachment Point ↑  $ Risk Margin ↓
– Needs a higher Profit margin (as % of premium)
•Attachment Point must be defined
– Often as % of theoretical premium
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Who handles IBNR Reserves ?
• Employer
– IBNR reserves can be excluded from calculation to determine
whether attachment point is reached or not
» Need lower attachment point in 1st year if IBNR
are not considered
– Who handles DLR for STD / LTD ?
– DLR may be split between insurer and Employer if the first
“N” years of LTD are self-insured
– More difficult to have annual Stop-Loss
» DLR vary with recoveries
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Used for not-so-large groups on
• STD, Health and Dental
– Experience must be reasonably stable
– Or Employer must be willing to live with high attachment point
» And greater fluctuations
–Used for large groups on LTD
• More complex than pure self insurance
– Equivalent to longer STD followed by LTD
with longer elimination period
• Employer must hold reserves for claimants
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Client / Consultant must negotiate over:
• Expenses on self-insured portion of plan
– Claims Administration
– General Administration
– Profit charge
• Attachment point
– What % of theoretical premiums ?
• Stop-Loss Premium
– Level of premium in relation with Attachment point
– Risk and Profit charges included in Stop-Loss premiums may
or may not be disclosed
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
–Client need help from consultant to set up:
• INBR Reserves
• DLR Reserves (for disabled employees)
– STD
– LTD (what modification of GLTD ?)
– CICA 3461 Valuation on LTD
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Tax considerations
• GST does not apply
• Quebec Sales Tax (7.5%) does not apply
• Ontario Sales Tax and Quebec’s 9% Tax apply to
claims + expenses
• Premium taxes apply in Ontario, Quebec and
Newfoundland (2% in ON and QC; 4% in NF)
on claims + expenses
• Quebec’s Compensatory tax (0.35%) also applies on
claims + expenses
• Non taxable self-insured STD or LTD is impossible
Session GRP-5 : Financial Arrangements 101
CIA Annual Meeting  Assemblée annuelle de l’ICA
•Partial Self-Insurance
– Client Incurs Additional (External) Costs
• Increased Audit Costs
– Reserves
– Benefit payments
• Taxable benefits (in Quebec): more complex to calculate
– Calculation generally done by Consultant
• Legal Costs
– Employees who are not satisfied with benefit payments
will sue the Employer
Session GRP-5 : Financial Arrangements 101