Risk Premiums and Reinsurance by she20208

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									Risk Premiums and Reinsurance
             A Cyberseminar with State Officials
            AcademyHealth, Washington, DC, December 6, 2006


                            Moderator
                               Enrique Martinez-Vidal
                            Presenter-Discussants
                               Randall R. Bovbjerg, The Urban Institute
                               Linda Blumberg, The Urban Institute
                               Karl E. Ideman, Pool Administrators Inc.
                               Katherine Swartz, Harvard School of Public Health
                               James W. Mays, Actuarial Research Corp.



Cyberseminar, Reinsurance Inst.                                       AcademyHealth/SCI
                                          6 Dec. 2006 ; slide 1
                                  Roadmap
   Welcome, Goals, Process                                Martinez-Vidal
   Risk Premium - Introduction                            Bovbjerg
   What insurers say                                      Blumberg
   Small group reform’s reinsuance                        Ideman
   HealthyNY: role of risk premium                        Swartz
   HealthyNY: other possible influences Mays
   Wrap-up                                                Bovbjerg
   Questions and open discussion                          Martinez-Vidal



Cyberseminar, Reinsurance Inst.                                AcademyHealth/SCI
                                   6 Dec. 2006 ; slide 2
    Possible Goals of Reinsurance
 Public goals
  Encourage enrollment by subsidizing cost
         –   Reduced insurer costs reduce premiums
         –   Additional impact from lower “risk premium”
         –   Insureds/employers still contribute
         –   Lower premium attracts more healthy insureds
      Targeted subsidy; ex post risk adjustment
      Reduce costs of unfavorable selection, cut
       benefit of cream-skimming
      Help new market by assuming high,
       unfamiliar risk
       Source: “Reinsurance 101,” slide 8, Albany presentation
       http://statecoverage.net/0906/BovbjergSwartz.ppt

Cyberseminar, Reinsurance Inst.                                  AcademyHealth/SCI
                                        6 Dec. 2006 ; slide 3
   Implementation of Reinsurance

    Likely part of a reform package
       – other parts of HealthyNY included targeting to
         uninsured, slimming down benefits
    Impacts also depend partly on existing
     environment




Cyberseminar, Reinsurance Inst.                           AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 4
                 What Is “Risk Premium”

         -- the extra increment of return on capital
            that a risk bearer demands in
            compensation for accepting a higher
            level of risk than some benchmark
            alternative use of capital




Cyberseminar, Reinsurance Inst.                           AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 5
  Familiar Example, Bond Interest




         Market sets higher returns for worse-
          rated bonds
    Source: http://www.bondvillage.com/

Cyberseminar, Reinsurance Inst.                               AcademyHealth/SCI
                                      6 Dec. 2006 ; slide 6
                   Health Insurance Rates
Components                              Influences
                                  Overhead costs, including:
  Loading                           – sales, claims admin., premium taxes, other
  factor                          Profit, including:
                                    – return on standard risk, plus “premium” above
                                      standard return because of add’l risks
 Medical
 losses                           Benefit design, including:
                                    – cost sharing, extensiveness of benefits, mandates,
 expected                             openness of provider network, drug formulary
 i.e., ave.                         – cost containment features
        +
 claims or                        Enrollee characteristics, as permitted:
 “pure                              – age, sex, medical conditions, other
 premium”                         Firm characteristics
                                    – Industry, region
                                  Projection factors

 Cyberseminar, Reinsurance Inst.                                            AcademyHealth/SCI
                                             6 Dec. 2006 ; slide 7
         Additional, Secondary Risks
    Primary insurers’ can mis-project average
     claim expenses (more below)
    Random variation not high for large risk pool
                                           $8,000
                Expected Value of Claims




                                           $7,000
                                                           99% Confidence Lim it
                                           $6,000

                                           $5,000
                                                    Expected Avg Loss = $5,000
                                           $4,000

                                           $3,000

                                           $2,000
                                                    200    500      1,000       2,000    5,000   10,000 20,000

                                                             Num ber of People in Risk Pool


Cyberseminar, Reinsurance Inst.                                                                            AcademyHealth/SCI
                                                                 6 Dec. 2006 ; slide 8
           Indicators of Risk Premium
    Clearly exists, see in willingness of (some)
     primary carriers to pay for private reinsurance
    Individ. & sm. grp. loading is higher than large
    Random variation and selection are both less
     in large groups
    Risk premium is part of profit, and profits are
     not large
    Industry sources consulted so far suggest
     that risk premium is not large

Cyberseminar, Reinsurance Inst.                           AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 9
                             Insurer Perspective
    Risk premium has many components:
       – Catastrophic claim variance;
       – Provider unit cost “breakdowns”;
       – New therapies emerging in unknown fashion or
         other unanticipated changes in underlying trends;
       – Significant gain/loss in membership;
       – New product introduction;
       – Other nightmare creatures “under the bed”.
      … but is small across a block of business


Cyberseminar, Reinsurance Inst.                             AcademyHealth/SCI
                                   6 Dec. 2006 ; slide 10
Small-Group-Reform Reinsurance
    Reinsurance in states with small-group-
     market insurance reform
       – Spreads risk of high cost enrollees
       – No external subsidy
    “Big players” in states with voluntary
     reinsurance want to opt out
       – Reinsurance not perceived to lower their risk
         enough to share costs




Cyberseminar, Reinsurance Inst.                            AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 11
 Healthy New York Experience -1
Risk premium role?
 Original estimate was that the $30-100,000
  corridor would reduce med. costs by 15-18%
  relative to same policy without reinsurance
 Actual premiums were <50% of regular non-
  group
 HMOs may have felt political pressures or
  reduction in risk premium was above
  expected cut in medical losses

Cyberseminar, Reinsurance Inst.                            AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 12
Healthy New York Experience - 2
Other considerations?
 Favorable selection, i.e., lower-risk enrollees
  from among previously uninsured
 Merging of premium rates for small group and
  individual coverages
 Trimmed benefit package of HNY

 Reduced private reinsurance premiums

 Relevance of observed loss ratio shifts after
  reinsurance shift

Cyberseminar, Reinsurance Inst.                            AcademyHealth/SCI
                                  6 Dec. 2006 ; slide 13
                                  Wrap up
   Risk premium exists
   Its size is not clearly established from theory
    or prior experience
     – what will matter in a new state is what participating
       primary insurers believe, then observe about risks
     – size(s) of participating insurer(s) also relevant
   Project is seeking out more information
     – HealthyNY, nature of variation within our cost
       model, opinions of experts, market participants


Cyberseminar, Reinsurance Inst.                             AcademyHealth/SCI
                                   6 Dec. 2006 ; slide 14
                                  The End
                                  . . . Time for questions




Cyberseminar, Reinsurance Inst.                                   AcademyHealth/SCI
                                         6 Dec. 2006 ; slide 15

								
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