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					      Society of Actuaries



Update on Health Reinsurance
           Market

         October 2002

                               1
                Presenters

- Dan Wolak       General & Cologne Life Re

- Lina Cheung     Milliman USA

- Michael Frank   Aquarius Capital



                                              2
       Topics of Discussion

•   Overview of Reinsurance Market
•   History
•   Underwriting
•   Pricing
•   Reserving


                                     3
     Stop Loss Purchasers
• Insurance Carriers
   - Program Managers
      • Managing General Underwriters (MGUs)
      • Third Party Administrators (TPAs)
      • Marketing Entities/General Agencies
• Health Maintenance Organizations (HMOs)
• Medical Provider Groups (“Risk Taking”)
• Employer Groups (“Self-Funded”)
                                               4
        Need for Reinsurance
• “Intellectual Capital”
    - Entry into new markets
• Risk-Based Capital Relief
• Regulatory Requirements
• Risk Transfer of Catastrophe Exposure
• Leveraged Return on Capital
• Not a vehicle to “dump loses on ignorant
  capacity”
                                             5
       Types of Reinsurance
• Fully Insured Medical Plans
        - Quota Share
        - Portfolio Excess – Per Person & Aggregate
• Self-Insured Employers
        - Specific & Aggregate Stop Loss
        - Written by primary carrier
        - May be ceded to reinsurer(s)
• HMOs & Provider Groups
       - Per Person Excess of Loss
• Specialty Medical Groups/Carve-Outs
       - Per Person Excess of Loss

                                                      6
The Health Insurance
   “Food Chain”

     INSURANCE CO.

        DIRECT
      BROKER/GA

       EMPLOYER




                       7
The Reinsurance
 “Food Chain”
 REINSURER


INSURANCE CO.   INTERMEDIARY

   DIRECT
 BROKER/GA

 EMPLOYER



                               8
        More Reinsurance
• May be multiple reinsurers on a program
   - A designated “Lead” reinsurer
   - Spreading risk among multiple parties
• Reinsurers may purchase reinsurance (retro)
   - Quota Share
   - Excess of Loss
   - Aggregate Stop Loss
   - Multiple Layers

                                                9
          Retrocessionaire
•   The Reinsurer’s Reinsurer
•   Far away from the retail action
•   Not far away from the retail losses
•   Many expenses may be added to program
    by time it gets to “retro market”



                                        10
The Retro Reinsurance
     “Food Chain”
 RETROCESSIONAIRE



    REINSURER       INTERMEDIARY


  INSURANCE CO.     INTERMEDIARY

      DIRECT
    BROKER/GA

    EMPLOYER

                                   11
…AND SO ON…



              12
Traditional Department Functions
      in Insurance Company
• Marketing
• Underwriting
• Claims
   - Including medical management and provider
      networks
• Accounting
• Compliance
• Actuarial
                                             13
Insurance Functions Oversite
•   Marketing      Program Manager
•   Underwriting   Program Manager
•   Claims         Program Manager
•   Accounting     Program Manager

• Compliance       Insurance Carrier


                                       14
   Insurance Functions Oversite
             (cont’d)
• Actuarial
• Who is Responsible or Accountable for pricing
  and reserving?
   - Insurance Company
   - Reinsurer
   - Program Manager
   - Outside Actuary
   - Marketing Department
• Who Should be Responsible or Accountable?
                                                  15
                  Retail Health Plans
                  Overview of Market
• Health Plans challenged to meet financial objectives
    - Limited “long term” ability to obtain rate increases above inflation
    - Continual changes in healthcare reform (state and federal)
    - Pressures to meet investor demands (profit and growth)
    - Managed Care Plans want to transfer more risk to providers
    - Insolvencies




                                                                       16
          Retail Health Plans
      Overview of Market (cont’d)
• Employers concerned about cost of health benefits
  especially during economic hardships
  – Fully Insured Plans:   15% to 25% Rate Increases
  – Self-Funded Plans:     30% to 50% Rate Increases




                                                       17
                       History
Profitable Period (Late 1980’s- early 1990’s)

• Less Capacity
• Purchaser less focused on fees for reinsurance
   - Smaller “slice of the expense pie”
• Impact:
   - High medical trend
   - Market accepted high premium trend
    - High margin allowed room for mistakes
                                                   18
                       History
Unprofitable Period (mid 1990’s – 2000)
   – Many reinsurers experienced
      • specific loss ratios > 125%
      • aggregate loss ratios > 200%
   – Major exodus in 1998 & 1999
      • Retrocessionaires lose $ in pools (e.g., Unicover)
      • True-up of historical reserves – Unanticipated Losses


                                                             19
                History (cont’d)
Unprofitable Period (mid 1990’s- 2000)
• Losses were due to a combination of all of the following
    - Capacity in mid 90’s significantly greater than the early
       90’s
       • Market Pressure drives rates downward
    - Non-risk bearing entities (e.g., MGUs) were writing for fee
       income
     - Uncontrolled expenses
     - The market did not effectively underwrite and price for
       managed care
     - Sold rates were materially below manual rates
                                                                  20
              History (cont’d)
Unprofitable Period (mid 1990’s – 2000)
• 1990’s Market Pool Controlled
   - Stop Loss Facilities on rise
      - Mergers & Acquisitions “Increased” Capacity
   - Special Accident High Excess Programs
   - Moved to Low Layers on W.C. Carve-outs
• Problems
   - Trusted People with the wrong incentives
   - Gave away underwriting control or lacked
     underwriting discipline                          21
        Companies Exit Medical
          Reinsurance Arena
      Company’s In Market in 90’s Out in 2002

•   Swiss Re               •   General American
•   Sun Life               •   Guardian
•   Transamerica Re        •   Life Re
•   CNA                    •   AUL
•   Lincoln                •   ManuLife
•   D&H                    •   Phoenix Mutual

                                                22
   History – Today’s Marketplace
• Excess Market
    - Provides good coverage when purchased for right reasons.
    - Challenge: Buyer can know more about risk than Seller. (On Direct
      side, Seller, i.e. carrier, knows more.)
• Quota Share
    - Few Players
    - Requires dedicated staffing
• Right Reason to Buy Reinsurance
    - Add to Gross result
    - Desire Value added &/or technical expertise
    - Capacity issues

                                                                   23
     Mergers & Acquisitions
• Safeco (Swiss Re/Lincoln & ING)
• HCCB (Centris/US Benefits)
• Consolidation in MGU Market
• Consolidation in the Retail Market
   - Consolidations of Large HMOs



                                       24
                    Development
Turning Point (2001 –2002)
Initial triggers:
   – Past losses
   – Economic downturn
   – Decrease Capacity (Retros & Reinsurance MGUs)

9/11:
   – Decreased tolerance for unprofitable, non-core business
   – Tough ROE expectations



                                                               25
Development (cont’d)




              Hardening
               Market


                          26
Seventh Inning Stretch



    Questions????



                         27
Underwriting Issues



                      28
   Underwriting Experience
Profitability




          $0


    Late 1980’s-early 1990’s   Mid 1990’s to 2000




                                               29
           Underwriting
       “Tighter Guidelines”
• Program Manager (Stop Loss)
   - Minimum premium rate increases
  - Minimum case sizes/deductibles
  - Better Disclosure on Large Claims &
    Appropriate “Lasering”
  - Defined methodology for experience rating
    aggregate stop loss
                                          30
           Underwriting
   “Tighter Guidelines” (cont’d)
• Program Manager (All Products)
 - Client effectively manages and audits its distribution (e.g.,
  TPAs)
   • Not everyone is a “preferred” market
 - Better Analytics
 - Better discounting discipline
    • Value of Managed Care
    • Preferred Distributions
    • Higher Trend
                                                                   31
             Underwriting
     “Tighter Guidelines” (cont’d)
• Reinsurers (All Products)
   - Program managers and fronting carriers with “skin in the game”
       • Assume risk
       • Program Manager contractually tied to reinsurer
   - Expense Management (Reduced Fees)
       • Levels of “Food Chain” must provide value
   - Analytics and Due Diligence
       • “Do your homework”
       • Is data management and reporting in place and is information being
         used to manage business?
       • Use Actuarial Intelligence
                                                                          32
              Underwriting
      “Tighter Guidelines” (cont’d)
•   Reinsurers (Continued)
      - High premium increases/ROE objectives
         • Ensure pricing reflects profit margins

       - More selective in choosing partners




                                                    33
Pricing Issues



                 34
                       Pricing Trend
• CPI-M
   - Historical development & outlook
• First Dollar Trend
   - Charge & utilization trends
   - Provider arrangements

• Stop Loss Trend
   Considerations
        First dollar trend
        Distribution of claim costs
        Benefit Coverage
        Deductible level               35
                           Health Cost Index - Trend
                 14.0


                 12.0
Annual Trend %




                 10.0


                  8.0

                  6.0


                  4.0

                  2.0


                  0.0
                                    J ul -9 4



                                                            J ul -9 5



                                                                                     J ul -9 6



                                                                                                             J ul -9 7



                                                                                                                                     J ul -9 8



                                                                                                                                                             J ul -9 9



                                                                                                                                                                                     J ul -0 0



                                                                                                                                                                                                             J ul -0 1
                        J an -9 4



                                                J an -9 5



                                                                         J an -9 6



                                                                                                 J an -9 7



                                                                                                                         J an -9 8



                                                                                                                                                 J an -9 9



                                                                                                                                                                         J an -0 0



                                                                                                                                                                                                 J an -0 1



                                                                                                                                                                                                                         J an -0 2
                                                                        A nnual Tr end in 3 M onth M oving A ver age
                                                                        A nnual Tr end in 12 M onth M oving A ver age


                 Source: Milliman USA - Health Cost Index Report
                                                                                                                                                                                                                                     36
                                                                                    A n nu a l Tre nd % - 1 2 -M o n th M o v in g A v era ge




                                                                                        2.00
                                                                                               2.50
                                                                                                      3.00
                                                                                                             3.50
                                                                                                                    4.00
                                                                                                                           4.50
                                                                                                                                  5.00
                                                                                                                                         5.50
                                                                                                                                                6.00
                                                                             Ja n -99

                                                                            M ar -9 9

                                                                            M ay -9 9

                                                                             Ju l- 99

                                                                            S ep -9 9

                                                                            N ov -9 9




                                                  Medic al C P I
                                                                             Ja n -00

                                                                            M ar -0 0

                                                                            M ay -0 0

                                                                             Ju l- 00

                                                                            S ep -0 0




Source: Milliman USA - Health Cost Index Report
                                                                            N ov -0 0

                                                                             Ja n -01

                                                                            M ar -0 1

                                                                            M ay -0 1

                                                                             Ju l- 01

                                                                            S ep -0 1

                                                                            N ov -0 1

                                                                             Ja n -02
                                                  HC I P ric e C omponent
                                                                                                                                                        HCI Price Component




                                                                            M ar -0 2
                                                                                                                                                       Medical Services CPI vs.




                                                                            M ay -0 2
       37
                                                                                                                  A n nu a l Tre nd %




                                                                                             2.00
                                                                                                    3.00
                                                                                                           4.00
                                                                                                                      5.00
                                                                                                                             6.00
                                                                                                                                    7.00
                                                                                                                                           8.00
                                                                                                                                                  9.00
                                                                                  Ja n -99

                                                                                 M ar -9 9

                                                                                 M ay -9 9

                                                                                  Ju l- 99

                                                                                 S ep -9 9

                                                                                 N ov -9 9

                                                                                  Ja n -00

                                                                                 M ar -0 0




                                                  3- M onth M oving A ver age
                                                                                 M ay -0 0

                                                                                  Ju l- 00

                                                                                 S ep -0 0




Source: Milliman USA - Health Cost Index Report
                                                                                 N ov -0 0

                                                                                  Ja n -01

                                                                                 M ar -0 1

                                                                                 M ay -0 1

                                                                                  Ju l- 01

                                                                                 S ep -0 1

                                                                                 N ov -0 1

                                                                                  Ja n -02

                                                                                 M ar -0 2
                                                  12- M onth M oving A ver age




                                                                                 M ay -0 2
       38
                                                                                                                                                         CPI – Hospital & Related Services
                              Pricing Trend
   Examples of deductible leverage effect
   (Milliman 2002 Health Cost Guidelines – Reinsurance, Commercial, all benefits)

                                                   First Dollar Trend
Attachment Point                     5%                       10%                   15%

$100,000                           11.1%                    22.2%                   33.3%

$150,000                           11.9%                    23.8%                   35.7%

$250,000                           13.1%                    26.2%                   39.3%




                                                                                            39
                      Trend
               Fall, 2000 and Now
  Specific               Used For              Latest (actual
  Deductible             1/2001                2001??)
  $50,000                21.5%                 29.0%

  $100,000               25.0%                 34.0%

  $200,000               28.0%                 36.0%

Based on blend of several consultant manuals and General & Cologne
Life Re analysis.                                                    40
           Pricing Large Claims
  PEPM by Deductible

                 $250K       $500K     $750K
  1995           $1.64       $0.21     $0.02
  1996           $1.61       $0.19     $0.05
  1997           $1.62       $0.30     $0.03
  1998           $1.70       $0.30     $0.05
  1999           $2.19       $0.57     $0.14
  2000           $2.74       $0.53     $0.08
  2001           $2.39       $1.20     $0.31
From SF 2002 Session on Large Claims
                                               41
                     Pricing
• Pricing of High Excess has seen rapid trend since
  2000.
• Drug coverage is now a pricing factor for Specific.
• Rate to Manual relationship as a control item.
• Monitor Network and Discounts applied.
   - Has been used as hidden underwriting discount
• Identify costly providers



                                                        42
   Access to Outside Data????
• Lack of Uniform Industry Data
• Stop Loss Claims Study in Early 90’s
• Surveys
   - Tillinghast
   - Apex
   - Aquarius Capital (in process)


                                         43
Reserving



            44
                   Reserving
• Who Sets Them?
  - Direct Writer vs. Reinsurance
• Data Challenges
  - Availability
  - Quality
• Technical Calculations
• Business Considerations

                                    45
                 Reserving
• Technical Calculations
   - Reserving cells
   - Reserve Methodologies
     • Lag Development
     • Expected Loss Ratio
     • Definitions of “incurred claims”

   - Premium deficiency reserve

                                          46
              Reserving
• Utilize various reserving methods
   - “Chain Ladder”
   - By Risk Attaching Month
   - Use Actual Rate Increases adjusted by Trend
   - Never use Case Reserves




                                              47
                       Reserving
• A&H Reinsurance Reserves set in late 90’s have developed
  significant adverse development.
• Due to:
       - Soft market
       - Medical trend
       - Non-traditional A&H reinsurance coverages
       - Issues with Pool Programs (Stop Loss & Workers Comp
         Carve-outs)
       - No certifications of reserves
• No actuarial accountability.

                                                         48
Okay…so what’s the actuaries’
 responsibility for this?




                                49
          Role of the Actuary

• More Analytics
• Obtain a better understanding of business
  considerations
• More of a need for conservatism today
• Stop Loss is a volatile coverage
   - management must accept “lumpy” results to be
     in business.

                                             50
  Business Considerations
   for Pricing & Reserving
- Historical loss experience
- Medical trend
- Sold premium rates & premium trend
- Changes in underwriting practices
- Written premium volume and expected premium
  Changes in rate setting
- Known claims: actual & potential
                                          51
Open Discussion



                  52

				
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