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De-risking your benefits program: understand the exposure.

RISK MANAGEMENT IS OFTEN OVER looked as a priority with respect to employee benefit programs. However, the risks are real and costly and should very much be on the radar screen of senior management.

A benefits program is an investment and as with all investments there are inherent risks: risk that the expected return does not materialize; risk that what you thought you "bought" turned out to be different than what you got; risk that the cost of managing the investment significantly reduces your return. And with all investments, there are opportunities to minimize these risks and in the process, maximize the return on your benefits plan investment.

The list of risks is long, and varies in both length and significance for each organization. These risks include:

Inadequate coverage--A benefits program is intended to protect employers and their families from the consequences of ill-health, disability and death. If the coverage is poorly designed and inadequate, it may put the plan sponsor in a difficult position. There have been many examples of where a gap in coverage has led to the employer paying for a benefit out of general revenues if for no other reason than they felt it is the right thing to do.

Unintended promises--The benefit promise may be articulated in any number of places--the group insurance contract, the collective bargaining agreement and the employee handbook or benefit enrollment material. Unfortunately, this information is often inconsistent or incomplete which can lead to unintended promises. Sometimes the documentation is simply too vague and subject to different interpretations. The plan sponsor may be put in a position of defending their opinion in court, going through a grievance process or simply paying a claim that was never intended to be covered.

Unexpected costs--The benefits environment can generate unplanned costs. Provincial governments have been active in managing their healthcare expenditures resulting in potential cost shifts to employer-benefit programs. Plan sponsors without clear, up-to-date definitions of what the plan covers--and what it does not--can experience cost creep. This will be a significant exposure for employer benefit plans in the future.

Uncontrollable costs--The cost of many aspects of the plan will continue to escalate. Disability plan costs are expected to continue to rise and relatively few plan sponsors have considered the future impact of high-cost medications on their extended health plan costs. Benefit plan costs may become unaffordable in the future unless steps are taken today to immunize the plan from these uncontrollable costs.

The cost of administration/communication errors--Mistakes happen. They are often innocent administration errors, sometimes with significant financial consequences. Lost or misplaced enrollment forms are a common error. When a claim is filed by the un-enrolled employee, more often than not, the sponsor digs into their pocket to pay. Communication errors can be equally as problematic if inaccurate or incomplete statements are made which can lead to a misrepresentation of the benefit promise to employees.


Reputational risks--A well designed and appropriately delivered benefits program can enhance an employer's standing with their employees and families. The rules of customer service tend to apply--when employees have a good experience with the plan or its delivery, they will tell one other person. When they've had a bad experience, they will tell 10 people. A poorly designed program with problems in its delivery can damage an employer's credibility--both internally and externally.

Poor execution - More times than not, an organization relies on others to deliver on their benefit promise to employees and in the process protect the organization from many of the risks described here. An insurance company is likely used to underwrite all or a portion of the benefits obligation and to pay claims. And a benefits advisor may be used to provide counsel and to protect the interests of the organization and their employees. As with any business, the capabilities of advisors can vary considerably, and as a result an organization needs to pay attention and do proper due diligence. The consequences of poor delivery and/or poor advice can be significant.

De-risking your benefits program starts by understanding the exposures in your plan and knowing that you can mitigate them. It involves establishing clear objectives for benefits programs and a framework for decision making in the management of key risks including the assignment of responsibilities and accountabilities.

There are far too many plan sponsors that believe their liabilities are covered by the premiums that they pay and that at the end of the day "it is just insurance." Insurers, by definition, are experts on risk. Now, more than ever--driven by economic pressures and shareholder demand--insurers are exercising their expertise at risk mitigation to manage their own businesses.

It is up to the plan sponsor to understand what this means to them and mitigate their own plan risks.

Some key steps in de-risking your benefits program include developing a decision making framework. De-risking your benefits program is not a one-time event. It needs to be embedded into the ongoing benefits management activities of the organization. Here are a few simple steps to follow.

Documentation review--Pull all the documentation related to your benefits program together and assess what you have today. Identify inconsistencies and vague descriptions that could lead to unintended promises.

Funding review--On a regular basis, plan sponsors should review the basis on which their plans are funded or underwritten. Self-insurance of certain benefit obligations may have been a good option five years ago--it may be less attractive today. The underwriting basis of the benefits program needs to reflect the risk tolerance of the organization together with the ability to pay unexpected costs.

Articulate roles & responsibilities--There are a number of individuals involved in the appropriate management of a benefits program. These roles need to be clearly articulated together with their accountabilities.

Administration review--Well-defined administrative processes and HR effectiveness reviews can help to reduce these errors. If it is a resourcing issue, there are alternatives available.

Reporting and monitoring--An organization needs to answer the question - how are we doing in managing the risks inherent in our benefits program? This involves the establishment of a formal reporting process and the regular review of all stakeholders involved in the delivery on the benefits promise to employees.

There will always be risks related to the provision of employee benefits. However, a well designed, well funded and an appropriately managed benefits program can significantly reduce these risks and maximize a plan sponsor's return on investment.

Brian Lindenberg is a senior partner with Mercer. This article first appeared in Benefits Canada magazine in October 2010.
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Title Annotation:HUMAN CAPITAL
Author:Lindenberg, Brian
Publication:CMA Magazine (Mississauga)
Date:Jan 1, 2011
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