Group Benefits Funding

1. Insured

The insurer assumes all risk. This is generally the most expensive option because of higher fees and rated benefits. The insurer keeps any surplus, but the employer is protected from deficits. Coverage is also eligible for EP3 pooling.

The employer’s only responsibility is paying premiums, which remain stable throughout the year. Depending on group size, rates are either:

• Fully pooled with the insurer’s overall block of business, for Life benefits and LTD under 300 to 500 lives.

• Partially experience-rated using the group’s own claims history. For Health and Dental small groups, 2 to 10 lives. Each insurer has their own credibility calculations but in general, once above 10 lives groups become fully experience rated in a year or two.

• Full Experience Rated using the group’s own claims history. Life benefits and LTD over 300 to 500 lives and Health and Dental over 10 lives depending on the insurer.

This structure is best suited for groups from 2 employees of up to 100-150 employees across all benefits.

Fees include: Target Loss Ratio (TLR), which incorporates general administration, claims administration, profit margin, commissions, taxes, and large health claims pooling charges (pooled as a % of paid premiums). While only the TLR is visible, it is calculated behind the scenes using these factors. For example:

• Claims of $100,000 ÷ (1 – (100% – 10%)) = $111,111

• $111,111 – $100,000 = $11,111 in insurer fees.

  
  

2. Refund

The insurer and employer share both risk and rewards. The group’s own claims experience determines the rates, which remain stable during the year. Refund funding does not include EP3 pooling.

At year-end, the insurer provides a financial statement showing the surplus or deficit position. Surpluses first build a Claims Fluctuation Reserve (CFR); once funded, excess amounts are returned to the employer. Deficits are recovered over 2–3 years through rate adjustments, and often are not immediately callable upon plan termination if there is no “hold harmless” signed.

Refund funding is usually less costly than insured plans but more than ASO. It balances cost efficiency with reduced risk exposure. It is generally suited for:

• Groups with 100+ employees for STD, EHC, and Dental,

• 500–1,000+ employees for Life and LTD.

  
  

Fees include: General and claims administration, profit, risk, commissions, taxes, and large health claims pooling (experience rated as a % of non-pooled premiums). When the CFR is not fully funded, insurers typically increase profit/risk charges. Fees are based on both premiums (general admin) and claims (claims admin). For example:

• $100,000 (premiums + claims) × 10% (general admin + claims admin) = $10,000 in fees — typically lower than under an insured plan with a TLR based on the way they are calculated.

  
  

3. ASO (Administrative Services Only)

The employer assumes full risk and pays actual claims plus an administration fee to the insurer. Surpluses flow directly back to the employer. This model has the lowest insurer fees and allows the greatest flexibility in plan design, claim payments, and funding structure — but exposes the employer to all claim risks, including large or unexpected ones, which can increase the pool charge.

ASO is typically best for:

• 100+ employees for STD or EHC, and 30+ for Dental,

• 500–1,000+ employees for Life and LTD,

• Employers with strong cash flow and risk tolerance.

  
  

A float may be required, and deficits may need to be paid immediately (which can impact cash flow). Budgeted rates are an option, allowing repayment of deficits at yearly reconciliation without interest until repayment is due. This is useful when:

• Employer requires stable cash flow

• Employees share premiums, or

• Québec employees are included (as employer-paid premiums are taxable income).

  
  

ASO does not include EP3 coverage, though large health claims pooling is added to help cap catastrophic claims when there is no drug maximum. It is often most effective after 2–3 years of being insured, once marketing discounts have been depleted and true premium levels are established.

Fees include: General and claims administration, profit, commissions, taxes, and large health claims pooling (experience rated as a % of non-pooled claims). No risk charge or IBNR reserve is required. Depending on the insurer and funding option chosen, interest is charged if no float is established or float is not fully funded. Some provinces also waive premium tax. Fees are based on actual claims. For example:

• $100,000 in claims × 10% = $10,000 in fees — typically lower than insured funding with a TLR.

  
  

ASO Funding Options (depending on insurer):

1.      Budget rates - stable insured rates, reconciliation at year end & normally no interest charged on monthly deficits

2.      Flat Monthly Deposit - a predetermined flat deposit is paid monthly, employers are keeping the money that otherwise would be used as a float to possibly invest themselves.

3.      Zero balance - direct withdrawal from bank account for total amount owed weekly, biweekly, monthly

4.      Arrears with a float - float is normally a month and a half of expected claims, insurers earn interest on employers float money

5.      Arrears with no float - normally interest is charged for the deficits each month