Hiring wave boosts group insurance premium volume

By Alain Thériault | November 23 2012 08:11PM

Drug costs are not the only driver of group insurance premium volume. Rising employment rates got in on the game in 2011.

The latest report by Fraser Group finds that group insurance premium volume rose by 3.8% in Canada between 2011 and 2010. The analysis firm estimates insurers’ total revenue from Canadian group plans at $32.5 billion.

Ontario insurers accounted for a little over half of this revenue with $16.3 billion in 2011, 3.1% growth over 2010. In second place was the Quebec group business market with $5.7 billion. The Prairies followed in third with $5.2 billion. The presence of several large manufacturers and head offices in Ontario explains the much higher total in Ontario compared to other Canadian regions. “This [figure of $16.3 billion] is for Ontario-based group plans. Location is determined by the head office of the employer. We consider the entire federal government to be located in Ontario,” explains Mr. Fraser.

Groups of 1000 employees or more accounted for the lion’s share of group insurance in 2011, at $20.9 billion, or 64% of the Canadian total. Groups of 50 to 999 employees made up 25% of the premiums, at $8 billion, while groups of 1 to 49 employees represented 11%, at $3.6 billion.

Growth faltering

For the last five years, real business growth has slowed notably, says Ken Fraser, president of the Fraser Group. “This last year’s growth of 3.8 % is rather slow. For the past five years, it hasn’t been over 5% in the whole marketplace. For a long time, on the total premium side, it used to rise at a 7% annual rate,” he explains. The only real business growth results from competitors’ snagging groups of insured from one another, Mr. Fraser adds.

Socioeconomic factors are the main engines of group insurance premium growth, Mr. Fraser continues. The rising employment rate has also fed this trend for many years. Statistics Canada reports that despite three recessions in the last 35 years, the employment rate rose from 57.1% in 1976 to 61.8% in 2011. “The employment rate decreased with the 2008-2009 recession, but considerably less than during the 1981-1982 and 1990-1992 recessions,” the Statscan website notes.

Statistics Canada defines the employment rate as the percentage of Canadian adults (15 years of age and over) working for pay, and thus in a position to earn income to take care of themselves and their families.

Ken Fraser puts the growth in the Canadian employment rate between 2010 and 2011 at 2%. The number of insured in group programs tends to increase accordingly. He adds that wages have also risen on average by the same percentage in 2011. The result: higher premiums for wage-related group insurance benefits such as disability insurance and life insurance. These factors have collectively propelled group insurance premiums.

A former nemesis of group plan sponsors – rising drug costs – is not the rampant inflation engine it once was. Growth in drug costs has slowed considerably in recent years.

Telus Health Solutions found that the growth rate of sales in pharmacies has plunged after peaking at 16.8% in 2000. Since 2010, this rate has been below 2%. Generic price reforms in some provinces and patent expirations are behind this trend.

In its 2011 Drug Trends Report, Express Scripts Canada (ESI) shows that the beneficial impact of generics is counterbalanced by waste in private plans. ESI states that even if drug spending remained flat in 2011, private plans in Canada wasted $5 billion in drug spending that year.

Yet insurers are still predicting rate increases. One of their projection criteria is called trend factors. These factors have been explored in a Fraser Group survey for years (Market View Trend Survey).

This year, the factors that insurers foresee in various provinces regarding increases in medical (hospital, drugs, paramedical and out of Canada) plan costs generally range from 11.2% to slightly more than 12%. Factors are lowest for dental coverage (excluding orthodontia), at between 7% and 10%. The Fraser group survey notes that these trend factors are only one of the components that insurers use to set prices.

Mr. Fraser points out that the high health category factors arise from reflexes insurers developed in the 1990s, when grappling with soaring drug costs. Back then, trend factors of 15% were not unheard of, he recalls.
“In the ‘90s, the industry was surprised by drug expenses increasing faster than the trend factors. After 2000, claims levelled off. Trend factors are now falling back to more reasonable levels,” he explains.

Heightened concentration

Market share has been static since 2010 (see table). In Canada, the Top 10 players of 2011 appear in the same order as in 2010. The Top 10’s concentration has grown again, from 95.3% to 95.5% between 2010 and 2011. Sun Life Financial and Manulife Financial saw a slight dip in market share, in favor of Desjardins Financial Security, SSQ Life, Greenshield, Industrial Alliance and La Capitale.

A new approach may have had a minor effect on the comparison of results between 2010 and 2011: student association insurance is now included in the premium calculation, Ken Fraser points out.

Fraser Group never includes Creditor and non-student affinity group premiums in its calculations.