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How does TLR work?

A TLR splits each dollar of premium spent on health and dental into claims costs and administrative costs. For example, on a 75% TLR, 75 cents of every premium dollar goes to claims and 25 cents goes towards administrative costs. Therefore, if your group has a higher TLR, there is more money to pay claims before seeing an increase in costs at your renewal.

An insurer will base your TLR on the size of your firm while trying to compete in the market with other insurers. For a 3 to 10 employee firm, a common TLR would range from 68-75%. For a 11-50 employee firm, a 75-80%+ TLR is more likely in a competitive market. Any group above 50 employees should follow this pattern with a 80%+ TLR.

On the administrative side, the insurer cost, premium tax and advisor commission are all built in. Many advisors will charge higher than market average commission, which may be why your group has a TLR that is lower than the suggested numbers above. If you have a low TLR, make sure you are getting value from your advisor as you are definitely paying for it! 

Understanding TLR at your renewal

TLR is taken into account when it comes time to renew your group benefits plan. Your insurer will base your renewal rate off of your TLR along with inflation, trend, weighting, credibility and other factors. To keep things simple today I will just show the numbers with TLR.

Let’s just look at Extended Healthcare (EHC) and a 75% TLR for this example. If you had

• $10,000 EHC premium paid
• $5,000 EHC claims

With the above numbers, you should see a decrease in your premium costs. Ignoring the other factors and just looking at TLR, your new rate for EHC should be $6,666/year instead of $10,000 (Math: $5,000 divided by 75%). This would give the insurance company $5,000 to cover expected claims and $1,666 for administrative costs.

One more example for an increase on a 75% TLR:

• $10,000 EHC premium paid
• $12,500 claims paid

With the above numbers, you should see an increase in your premium cost. Your new rate should be $16,666/year to cover all expected claims and administrative costs. This will be higher when you include the other factors, but it shows the importance of having a higher TLR on your yearly renewal so more of your premium dollars go towards covering claims.

Want to learn more or have our team review your benefits plan? Reach out to an HMA Advisor, we would be happy to help!

Is my group’s TLR fair?

As a business owner or HR professional you want to make sure that your benefits plan provides optimal value for your employees based on the expected premium dollars you have built into your budget. If you have been with the same insurer and advisor for many years, having a new pair of eyes to review your plan can help confirm if your plan stands up compared to insurers current offerings. Who knows, you may even be overpaying your advisor compared to fair market rates.

The benefit market shifts, so even if you are happy with your advisor, you should have them market your group plan every three years to make sure the rates and TLR you are renewing is fair compared to the current market. When reviewing a marketing proposal, make sure you include TLR in your decision as the lowest price may come from an insurer offering a large discount up front, but a low TLR that will impact your group with higher increases at each renewal.

While taking a discount might be nice in the first 1-2 years, a higher TLR and plan sustainability may be more important to you and your staff if they share in the cost of the plan.

What about the profit?

Your rates can go down after a year with low claims, but you may wonder where the extra money that was paid through monthly premium deposits goes. On a regular insured benefits plan, all excess will go back to the insurers as profit. This creates a bit of a dilemma, as your group may consistently spend less than the insurer anticipates, and you never get that premium back. 

At HMA, we have built a proprietary product called 3G that fixes this problem. On years with low claims, we have the ability to return the excess premium back to all the groups on the 3G plan through profit sharing and a loyalty dividend. Ask an HMA advisor today to see if your group is a fit for the 3G plan.

Have further questions? Call us today at 905-999-9510.