Group Income Protection Renewal With Mental-Health Claims
A group income protection (IP) policy covers 200 employees of a manufacturing firm. The annual premium is $180,000, experience-rated with a 70% experience refund and a three-year rate guarantee. In the latest year, three long-term mental-health claims began, with estimated annual cost of $95,000 each, lasting an average of 18 months. Before these claims, the scheme's loss ratio was 55%. The employer's broker has obtained a competing quote 15% lower, and the employer is threatening to move. The insurer's manual rate for this industry is $850 per employee; the current rate is $900. The insurer uses a credibility factor of 0.60 for groups of this size, and the reinsurer's stop-loss attachment is $100,000 per claim. The underwriter must recommend renewal terms.
1. Calculate an indicative experience-rated renewal premium and discuss credibility.
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The three mental-health claims cost $95,000 each, or $285,000 per year. Before those claims, the loss ratio was 55% of $180,000, or $99,000. Total expected claims would be $384,000. Add expenses, say 15% of premium ($27,000), and a risk margin. A simple gross premium before experience refund would be about $411,000 plus margin, or $2,055 per employee. That is far above the manual rate of $850.
Applying the 0.60 credibility factor to experience and 0.40 to manual: experience rate = $2,055; manual = $850; weighted = 0.6 × 2,055 + 0.4 × 850 = $1,573 per employee, or $314,600. The stop-loss attachment is $100,000 per claim, and these claims are below it, so no recovery. A 70% experience refund would not apply because claims exceed premium. I would not use a full single-year experience rate; instead, use a multi-year credible estimate and recognize that the claims may be ongoing.
2. Evaluate whether to match the competitor at 15% lower and the risks of doing so.
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The competitor quote is about $153,000, 15% below $180,000. Expected claims alone are $384,000, so matching would produce a loss ratio above 250% unless the competitor has different terms, claims management or data. Matching is not commercially rational without changing benefit design or unless the insurer believes the claims are one-off.
Risks include underpricing, future reserving strain, reinsurance cost, regulatory capital, and precedent for other groups. The broker may be using the quote as leverage. A better response is to explain the claims experience, offer a higher deductible, a claims-management program, or a rate cap. Do not match on price alone.
3. Recommend renewal terms and conditions.
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Recommend renewal at about $1,300–$1,500 per employee, with a 12-month rate guarantee and a 50% experience refund, plus the existing $100,000 stop-loss and a rehabilitation/mental-health support program. Require the employer to implement an early-intervention protocol and provide claims data. Offer a two-year rate-stabilization option if the employer commits to the program.
If the employer moves, accept the loss rather than write a loss-making case. Set a monitoring trigger: if claims exceed $250,000 in the next 12 months, renegotiate. Document the credibility weighting and the rationale for not matching the competitor.