Benefiting the Bottom Line
Employee benefits consultants and property/casualty brokers could see substantial gains as they move to take advantage of private exchanges for health care and other employee benefits.
Jim Blaney, chief executive officer, Willis human capital practice, said that offering clients private exchanges provides consultants and brokers with “a huge opportunity. … However, it’s all about gaining market share and converting new revenues.”
Roughly 30 million workers are expected to enroll in health care plans via private exchanges by 2017, “but costs and inertia could slow the adoption rate,” according Morgan Stanley research analysts.
“We think there are substantial market share opportunities for P&C brokers but large economic benefits will take years to materialize as they have to invest heavily to gain share,” the analysts wrote in a March 13 report, Private Exchanges: Friend or Foe.
For example, Aon Hewitt — which was “one of the first movers and the most vocal in private exchange efforts” — has invested roughly $100 million in its initiatives “which have not yet broken even,” according to the analysts. The firm has enrolled more than 600,000 members on its multicarrier, fully insured active employees exchange.
Aon executives were not available for an interview.
At Morgan Stanley’s Private Exchange Conference earlier this year, Aon said that it can overcome the cost gap and deliver up to 2 percent total savings for self-insured clients converting to Aon exchange.
A report by Moody’s offered a more positive viewpoint, concluding that the creation of private health exchanges “are credit positive for leading benefit consultants and brokers.”
“We believe the most successful exchanges will be those that minimize growth (or generate savings) in overall health care costs, rather than simply shifting costs from employers to employees,” according to a March 3 report.
Keys to success, it said, include building strong insurance carrier networks, guiding employees to select appropriate insurance coverage, promoting employee wellness, streamlining plan administration and ensuring compliance with regulations.
Blaney, at Willis, said that discussing its insurance exchange with clients and prospects is “a way to open doors,” as most employers are interested to learn more about both private and public exchange models.
“This gives us an opportunity to meet with potential new clients, build rapport and provide thought leadership and consulting. We are seeing an increase in new clients independent of whether they choose to use the private exchange,” he said.
Last year, Willis partnered with Liazon to offer clients The Willis Advantage, a private label of that company’s platform. Liazon, which was bought last year by Towers Watson, operates a multicarrier exchange with both self-insured and fully insured products.
“The Willis Advantage,” Blaney said, “is designed to be a consultative approach to help mid-market and upper mid-market clients consider the opportunity of advancing consumerism and possibly, a defined-contribution approach.
“We think our differentiation lies in our integrated health management capability aimed at addressing medical utilization trends,” he said.
The exchange includes built-in features such as incentive-based wellness options, health coaching, and disease-management programs, to help employees and employers drive down health care costs and increase productivity.
Over the past two quarters, interest in the private exchange has “spiked,” with 600 employers — both existing clients and prospects — considering adoption, he said. Two clients are currently on the platform, and another five are “in the queue.”
“The adoption rates for the mid-market seems to be evolving slower than adoption rates for the larger market, but in the next five years, I believe we are going to see a sizable migration toward defined-contribution funding approaches as employers seek to cap benefits costs and push more responsibility and accountability to employees,” Blaney said.
Mercer, the subsidiary of Marsh & McLennan Cos. launched its Mercer Marketplace in 2013. It currently works with 67 employers to provide medical and other benefits to 282,000 employees, retirees and family members.
The company recently expanded its service to offer access to individual medical plans via GetInsured, a California-based company whose technology platform powers state government exchanges.
Liazon, whose platform is used by more than 400 brokers — including Arthur J. Gallagher, Lockton and Brown & Brown — said larger brokers private label its platform, and can build in their own value-added support features, such as back-office capabilities, call centers, and employee assistance programs, said Managing Director Ashok Subramanian.
“This really enables brokers to leverage proven technology to wrap around their strategies, with a speed to market,” Subramanian said.
Smaller brokers use Liazon’s independent channel, Bright Choices, to save on costs, he said. Overall, Liazon has seen “an enormous uptick in usage over the past year, up 300 percent in 2013, from 2012.
“There is tremendous tailwind in the market for solutions like this among employers,” he said. “This happens to coincide with the opening of the public exchanges, but it’s not really related to that.”
Employers can also take advantage of private exchanges for retirees and older workers, such as Towers Watson’s OneExchange for Medicare-eligible individuals, said Bryce Williams, the consultancy’s managing director, Exchange Solutions.
“The Medicare market is so technical and highly regulated, that it’s less costly for them just to refer retirees to our exchange,” Williams said.
Currently, adoption rates are less than 5 percent, but Williams expects that in five to 10 years, adoption rates will rise to 50 percent, for employers who give their employees access to health care.
6 Non-Cyber Risks for Technology Companies
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.