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Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1...

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Casualty Actuarial Casualty Actuarial Society Society Reinsurance Seminar Reinsurance Seminar June 3, 2002 June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 1 Pennsylvania Plaza, 38 th th Floor Floor New York, NY, USA New York, NY, USA (212) 279-7166 (212) 279-7166 [email protected] [email protected]
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Page 1: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 2: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Exploding Exploding Liability TrendLiability Trend

Medical Reinsurance Products

Page 3: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 4: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 5: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 6: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 7: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 8: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Medical Reinsurance ProductsMedical Reinsurance Products

Others

– Medical management performance– Utilization stop loss for new drug

introduction– Etc.

Page 9: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

History & DevelopmentHistory & Development

Page 10: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Underwriting ExperienceUnderwriting ExperienceProfitability

$0

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

Page 11: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 12: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 13: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 14: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

DevelopmentDevelopment

Hardening Market

Page 15: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 16: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 17: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Medical Reinsurance Medical Reinsurance Liability ExplosionLiability Explosion

Page 18: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

What are the risks?What are the risks?

Asset &

Interest Rate Risks

Page 19: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

What are the risks?What are the risks?

Catastrophic

Random Fluctuation

Page 20: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

What are the risks?What are the risks?

Claim riskContractual/Regulatory riskPartner riskInformation risk

Page 21: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 22: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 23: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 24: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 25: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.

Page 26: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.

Page 27: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.

Page 28: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 29: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 30: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 31: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 32: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Food Chain RiskFood Chain Risk

Liability Explosion Risk #3:

Not knowing the one who feeds you the risk.

Page 33: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 34: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 35: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.

Page 36: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 37: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Information RiskInformation Risk

Liability Explosion Risk #4

You have no fact-based information on exposure and profitability, TODAY.

Page 38: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.

Page 39: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Underwriting CycleUnderwriting Cycle

Too Late

Warning Signal

Down Cycle

Page 40: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Risk ManagementRisk Management

Page 41: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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

Page 42: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Active Portfolio ManagementActive Portfolio Management

ActionableInformation

ManagementActions

Page 43: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

June 3, 2002 Milliman USA

Portfolio Information FlowPortfolio Information Flow

ActionableInformation

Fact-BasedManagement

Reports

Pre-defined Management

Actions

Page 44: Casualty Actuarial Society Reinsurance Seminar June 3, 2002 Lina S. Cheung, F.S.A, M.A.A.A. 1 Pennsylvania Plaza, 38 th Floor New York, NY, USA (212)

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.


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