Date post: | 26-Dec-2015 |
Category: |
Documents |
Upload: | delilah-horton |
View: | 217 times |
Download: | 1 times |
Casualty Actuarial Society Casualty Actuarial Society Reinsurance SeminarReinsurance Seminar
June 3, 2002June 3, 2002Lina S. Cheung, F.S.A, M.A.A.A.1 Pennsylvania Plaza, 381 Pennsylvania Plaza, 38thth Floor FloorNew York, NY, USANew York, NY, USA(212) 279-7166(212) [email protected]@milliman.com
June 3, 2002 Milliman USA
Exploding Exploding Liability TrendLiability Trend
Medical Reinsurance Products
June 3, 2002 Milliman USA
TopicsTopics
Overview– Medical reinsurance products– History and development
Medical Reinsurance Liability Explosion– What the risks are?– Food chain risk– Contractual risk
Risk Management
June 3, 2002 Milliman USA
Medical Reinsurance ProductsMedical Reinsurance Products
Employer Stop Loss
The insured is an employer who funds its first dollar employee health expenses up to a certain risk tolerance.
Common Forms of coverage:
Specific Stop Loss
Aggregate Stop Loss
June 3, 2002 Milliman USA
Medical Reinsurance ProductsMedical Reinsurance Products
Provider Stop Loss
The insured is the physician hospital organization (PHO), hospital or physician group which assumes a capitation risk from a health plan or a major employer.
Common form of coverage
Specific Stop Loss
June 3, 2002 Milliman USA
Medical Reinsurance ProductsMedical Reinsurance Products
Portfolio/HMO Reinsurance
The insured is an insurance carrier or a health plan. The scope of coverage could be a product, a block of business or the entire portfolio.
Common forms of coverageSpecific Stop Loss1st Dollar Quote Share
June 3, 2002 Milliman USA
Medical Reinsurance ProductsMedical Reinsurance Products
Specialty Carve-out Reinsurance
The insured is often a health plan or a major employer carving a specific risk from their portfolio.
Common form of coverage:
1st dollar 100% quota share
June 3, 2002 Milliman USA
Medical Reinsurance ProductsMedical Reinsurance Products
Others
– Medical management performance– Utilization stop loss for new drug
introduction– Etc.
June 3, 2002 Milliman USA
History & DevelopmentHistory & Development
June 3, 2002 Milliman USA
Underwriting ExperienceUnderwriting ExperienceProfitability
$0
Late 1980’s-early 1990’s Mid 1990’s to 2000
June 3, 2002 Milliman USA
HistoryHistory
Profitable Period (Late 1980’s- early 1990’s)
– High medical trend– Market accepted high premium trend– High margin allowed room for mistakes
June 3, 2002 Milliman USA
HistoryHistory
Transition Period (early 1990’s)
– Profits attracted capacity into the market– Supply fueled competition – Many reinsurers/stop loss carriers had no
experience in A&H stop loss – Many MGUs were formed– Some stop loss carriers served as fronting carriers
and retained minimal or no medical stop loss risk– Reinsurers supported competitive programs
June 3, 2002 Milliman USA
HistoryHistory
Unprofitable Period (mid 1990’s – 2000)
– Many reinsurers experienced specific loss ratios > 125% aggregate loss ratios > 200%
– Major exodus in 1998 & 1999
– Unicover
June 3, 2002 Milliman USA
DevelopmentDevelopment
Hardening Market
June 3, 2002 Milliman USA
DevelopmentDevelopment
Turning Point (2001 –2002)
Initial triggers:– Past losses– Economic downturn
9/11:– Decreased tolerance for unprofitable,
non-core business– Tough ROE expectations
June 3, 2002 Milliman USA
Current PracticesCurrent Practices
High premium increases/ROE objectives
Use of actuarial intelligence
Fronting carriers taking more risk
More selective in choosing partners
Reduced MGU fee and/or fee at risk
MGUs less resistant to sound business practices– limited discount off manual rates– toughened underwriting requirements– Regular detailed reporting
June 3, 2002 Milliman USA
Medical Reinsurance Medical Reinsurance Liability ExplosionLiability Explosion
June 3, 2002 Milliman USA
What are the risks?What are the risks?
Asset &
Interest Rate Risks
June 3, 2002 Milliman USA
What are the risks?What are the risks?
Catastrophic
Random Fluctuation
June 3, 2002 Milliman USA
What are the risks?What are the risks?
Claim riskContractual/Regulatory riskPartner riskInformation risk
June 3, 2002 Milliman USA
Claim RiskClaim Risk
Liability Explosion Risk #1:
If you don’t know what makes up your assumed risk,
You cannot Price itManage itDetermine your liability
June 3, 2002 Milliman USA
Claim RiskClaim Risk
Different medical expense components have different– Utilization trend– Inflation rate– Provider contractual arrangements
e.g. Hospital I/P, hospital O/P and Rx are experiencing higher trend than other medical expenses
June 3, 2002 Milliman USA
Medical Expense ComponentsMedical Expense Components
Hospital Inpatient Medical Surgical Psychiatric Alcohol & Drug Abuse
Maternity Deliveries Maternity Non-Deliveries
Skilled Nursing Facility
Hospital Outpatient Emergency Room Surgery Radiology Pathology Pharmacy and Blood Cardiovascular PT/OT/ST Other Maternity Non-Deliveries
Physician Inpatient Surgery Maternity Outpatient Surgery Inpatient Visits Office Visits & Miscellaneous Services Emergency Room Visits Consults Physical Therapy Cardiovascular Radiology Pathology
Other Prescription Drugs PDN/Home Health Ambulance Durable Medical Equipment Prosthetics Immunizations Well Baby Exams Vision Exams Glasses/Contacts Hearing/Speech Exams Physical Exams Physician X-Ray Lab Chiropractor Podiatrist Outpatient Psychiatric Outpatient Alcohol & Drug Abuse
June 3, 2002 Milliman USA
HCPCS
Medical Expense ComponentsMedical Expense Components
CPT-4 DRGICD-9MDC
Provider Type
Service Setting
Provider Affiliation
Detailed Benefits
Detailed Benefits
High Level Categories
ESL, PSL, P/HMO Re.
ESL, PSL, P/HMO Re, SSL
PSL, SSL
PSL, SSL
Scope and level of details For risk assessment and management
depends on the products
ESL: Employer Stop Loss; PSL: Provider Stop Loss; P/HMO Re: Portfolio/HOM Reinsurance; SSL: Specialty Carve-out Stop Loss
Examples of reinsurance products
June 3, 2002 Milliman USA
Medical Expense ComponentsMedical Expense Components
Commercial Population First Dollar Medical Cost
PMPM Distribution
Hospital Inpatient $ 69 25%Hospital Outpatient $ 56 20%Hospital Total $125 45%
Physician $105 38%Prescription Drugs $ 40 15%Other $ 5 2%
Total $275 100%
Source: Milliman Health Care Guidelines, comprehensive major medical at 7/1/02, nationwide average, Other excludes additional benefits.
June 3, 2002 Milliman USA
Medical Expense ComponentsMedical Expense Components
Excess Loss Attachment: $100,000
% of PMPM all benefits XS
All benefits XS $100k: $20.4 100%
Hospital XS $100K: $11.4 56%
Inpatient hospital XS $100K: $ 8.5 42%
Physician XS $100K $ 0.5 <1%
Source: Milliman Health Care Guidelines, CPD Tables 1A, 1BI, 1GI, nationwide average.
June 3, 2002 Milliman USA
Medical Expense ComponentsMedical Expense Components
Specialty Carve-out Reinsurance - Radiology
PMPM % of Total
Hospital Outpatient $10.9 45% IP (Professional) 0.5 2% OP (Professional) 3.0 12% Physician Office (Combined) 9.8 40% Physical Exams - X-Ray 0.1 <1%
Total $24.29 100%
Source: Milliman Health Care Guidelines, comprehensive major medical at 7/1/02, nationwide average.
June 3, 2002 Milliman USA
Contractual/Regulatory/Litigation Contractual/Regulatory/Litigation RiskRisk
Liability Explosion Risk #2:
Follow the fortune or more
- Broader scope of coverage than anticipated
- Open-ended contract term- Reinsurance becomes insurance
June 3, 2002 Milliman USA
Contractual/Regulatory/Litigation Contractual/Regulatory/Litigation RiskRisk
Broader scope of coverage than anticipated
Loosely defined – covered benefits– covered population (Medicare vs. Comm)– Limitations and exclusions
June 3, 2002 Milliman USA
Contractual/Regulatory/Litigation Contractual/Regulatory/Litigation RiskRisk
Open ended contract term
Most reinsurance contracts define risk attaching and paid periods.
Fully insured contracts – guaranteed issue and guaranteed renewable– 5 year exit rule for fronting carriers– Some reinsurance contracts terminate only there is
replacement reinsurance– Reinsurer has risk attaching forever– Premium rate increase limitations
June 3, 2002 Milliman USA
Contractual/Regulatory/Litigation Contractual/Regulatory/Litigation RiskRisk
Reinsurance becomes insurance
HMO insolvency coverage Litigation against reinsured health plan
– Claim payment decisions– Medical management decisions– Underwriting decisions– Actuarial certifications
June 3, 2002 Milliman USA
Food Chain RiskFood Chain Risk
Liability Explosion Risk #3:
Not knowing the one who feeds you the risk.
June 3, 2002 Milliman USA
Partner RiskPartner Risk
Self-Funded Employer
TPA/Retail Broker
Stop Loss Carrier
Reinsurer
Simple Food Chain
Retrocessionaire
Fully Insured
EmployerHealth Plan
PHO/PPM
June 3, 2002 Milliman USA
Partner RiskPartner Risk
Health PlanTPA/Retail
BrokerStop Loss Carrier
Retail MGU
Reinsurer
Medical Mgmt Co.& Other Vendors
Reinsurance MGU
Reinsurance Broker
Retro Broker
Retrocessionaire or Retro Pool
Real Food Chain
Self-Funded Employer/
PHO
PHO/PPM
June 3, 2002 Milliman USA
Example Example Safety Co wrote $100 million in employer stop loss $100 million
paid $12 million broker commission - 12 million
$13 million in MGU fee - 13 million
charged $5 million for carrier fee - 5 million
Net $ 70 million
Safety Co has a 50% quote share with Employee Re
Employee Re received $35 million in net premium $ 35 million
paid $1 million in reinsurance brokerage - 1 million
paid $1 million in reinsurance MGU fee - 1 million
charged $1 million for its expenses - 1 million
Net $ 32 million
Employee Re has 50% quota share with Friendsamerica
Friendsamerica received $16 million for 25% of the original risk, its internal expenses and retro broker expense.
June 3, 2002 Milliman USA
Partner RiskPartner Risk
You rely on
the retail broker/TPA to provide good risk representation to the retail MGU
the MGU to write profitable business, not volume the MGU/Carrier to manage premium eligibility and claims the MGU/Carrier to protect you with sound contracts The MGU/Carrier to protect you from litigation risks with
sound management practices the TPA/MGU/Carrier to provide timely reporting so you
know the facts
The longer the food chain, the greater the risk
June 3, 2002 Milliman USA
Information RiskInformation Risk
Liability Explosion Risk #4
You have no fact-based information on exposure and profitability, TODAY.
June 3, 2002 Milliman USA
Information RiskInformation RiskRisky responses to information need
We are building an information system to address all your data requirements. We are in the first twelve months of the treaty. The experience is not credible. Let’s
assume break-even. Our contracted underwriter told us that the high premium volume was due to high
premium rate increases. Although we only have six month of accounting paid data, I think we will meet our
profit target. Our MGU is very convincing. He sounds like he knows what he’s doing. Our MGU is giving us monthly data dump. We don’t know what to do with.
June 3, 2002 Milliman USA
Underwriting CycleUnderwriting Cycle
Too Late
Warning Signal
Down Cycle
June 3, 2002 Milliman USA
Risk ManagementRisk Management
June 3, 2002 Milliman USA
Risk ManagementRisk Management
Know the underlying riskContractually define your
reinsurance risk and limit your risk exposure
Don’t cross the line to insuranceAlign risk and rewards with your
partnersActively manage your portfolio
June 3, 2002 Milliman USA
Active Portfolio ManagementActive Portfolio Management
ActionableInformation
ManagementActions
June 3, 2002 Milliman USA
Portfolio Information FlowPortfolio Information Flow
ActionableInformation
Fact-BasedManagement
Reports
Pre-defined Management
Actions
June 3, 2002 Milliman USA
Successful Successful Risk ManagementRisk Management
Confident that ….
– Achieve your ROE objectives even in the first 12 months of the treaty.
– Will not require more than the allocated capital. (i.e. know your exposure and its profitability)
– Know When the Market is Turning and Know What to Do.