Group benefits can be a great way for an employer to show their appreciation for their staff and give them the opportunity to maintain their health and wellness with more support. But they can be complicated and come with several challenging concepts to understand, from knowing how the renewal process works to understanding terms like target loss or incurred loss ratio.
Target loss ratio (TLR) can be understood as the difference between the premiums your company pays for benefits and the amount of money the insurance company pays out in claims. It is primarily used by insurance companies to gauge their profitability, but can also help you anticipate possible changes to your group benefits.
When you look at the TLR for your group benefits plan and compare it to the premiums you paid and claims that were paid out, you may be able to get an idea of whether your premiums go up or down during your next renewal.
What Is Target Loss Ratio (TLR)?
TLR is a percentage used to evaluate the difference between premiums collected by an insurance company and the claims they pay out. Typically, this falls between 60% and 80%. From a business owner’s perspective, a higher TLR may be better because that can mean more of their premiums are paying for the claims.
But this must be balanced because there’s a chance that group benefits premiums may go up during the renewal process if the cost of paid claims exceeds the premiums collected by your insurance provider.
How Is Target Loss Ratio Calculated?
TLR is not typically something you will calculate on your end as a company providing group benefits for your employees. The insurance company that holds the benefits plan calculates the TLR based on its projected profit point.
Insurance companies have expenses, like any other company. The TLR divides claims costs and other administrative expenses as a percentage. For example, if for every dollar of premium paid, $0.75 goes to claims, and the remaining $0.25 goes to administrative fees and profit, this is a 75% TLR.
What Is Target Loss Ratio Used For?
TLRs are primarily used by the insurance company to gauge profitability, but they can be used to determine several other things as well.
For Insurance Companies
The management team of an insurance company may look at a TLR when making big decisions. Rate changes and setting target premiums, determining which products and plans are the most profitable, and comparing their performance compared to other companies are some of the things a TLR can affect.
For Examining the Financial Health & Compliance of an Insurance Company
An investor may use a TLR to gauge whether they want to invest in an insurance company. A lower TLR can suggest the company is more profitable compared to a higher one.
Regarding profitability, some regulators may set TLR limits to prevent excessive profits. This can vary by regulating body, though.
A consumer advocate may compare TLRs between various insurance companies to help you make an informed decision. The idea is that an insurance company with a higher TLR can be seen as returning most of the premiums as claims and not overcharging their customers.
How Does TLR Affect Group Benefits?
Although TLRs are primarily used by insurance companies, the TLR for your group benefits plan can also play a part in your premiums increasing or decreasing. TLR affects rates, combined with inflation, trend, and the relationship your broker has with the carrier.
This is best illustrated through a brief example:
Suppose your plan’s TLR is 75%, with your annual premium paid being $20,000 and your annual claims processed being $10,000. You may see a decrease in premiums because the actual TLR for the year was 25% lower than the target, meaning the insurance company gets more money for administrative costs and, ultimately, profit.
Now reverse those numbers for the same plan, with annual premiums paid at $10,000 and annual claims processed at $20,000. With those figures, there is a chance your premium rate may increase upon renewal because the cost of claims was significantly higher than the actual premiums paid.
Essentially, an insurance company may base your premium rates on getting close to the plan’s TLR once it is set.
Discuss Your Benefits Plan with Us
There is not much you can do as the benefit plan purchaser to change the TLR because it’s primarily set by the number of people on the plan and the premiums paid. But these aren’t the only things that determine a TLR.
For example, advisor commissions are built into the administrative costs, and if the insurer is charging higher than the market average commissions, this could affect your TLR. Profit is how a company survives, but you must get the value out of what you are paying for.
You are not alone if you find this all a little bit confusing. Group benefits and other insurance plans can be complex, especially for larger organizations. At Qopia Financial, we understand that each client’s needs are unique, and we have a professional team to meet those needs.
Give us a call today so we can discuss your group benefits plan. Together we can make sure you are getting the right value for the money you’re spending every month.
Life Insurance & Group Benefits Advisor
I love what I do and care for the people I help. I believe in choices and the cliché one-size-fits-all fits no one. My specialty revolves around helping business owners with both their group benefit needs and business succession plans through insurance products. Our team at Qopia Financial provides coverage that’s completely customized for your unique needs, whether the concern is for yourself, your family, or your business.
We are committed to providing you with professional advice and personalized service. Whether you are purchasing your first home, starting a small business or the CEO of a large company, our team has the knowledge and expertise to provide you piece of mind.