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12 Sept. 2006 ; slide 1 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Reinsurance 101
Presentation to Reinsurance Institute’s Kick-Off Meeting with States, Albany Marriott, NY, Tuesday, September 12, 2006
Randall R. Bovbjerg, J.D.(Bó - berg)
Principal Research Assoc., Urban Institute,†
PI for UI Reinsurance Inst.Team
Katherine Swartz, Ph.D.Harvard School of Public Health†
Expert Consultant for UI Reinsurance Inst.Team
† standard disclaimer applies
12 Sept. 2006 ; slide 2 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Roadmap
I. What is reinsurance?
II. How does reinsurance work?
III. What is the rationale for reinsurance?
IV. Why the current interest in reinsurance?
V. What’s the evidence on reinsurance?
VI. What is the SCI Reinsurance Institute?
VII. How does this presentation relate to the
rest of today?
12 Sept. 2006 ; slide 3 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
What Is Reinsurance? Insurance for insurers (or other large risk bearers) Vocabulary:
– the primary risk bearer cedes (transfers) the risk– the reinsurer assumes the risk– transfer may be prospective or retrospective – risk sharing may be
• proportional, akin to coinsurance (a.k.a. pro rata), or • excess of loss, akin to deductible (a.k.a. above threshold or
attachment point), or • a mix of both
– risk sharing typically has ceiling, creating risk corridor– may be specific (per insured person per year) or
aggregate (for whole line of coverage)
12 Sept. 2006 ; slide 4 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
How Does Reinsurance Work? Invisible to insured people, operates entirely
between primary carrier and reinsurer Prospective - familiar from small group reform
– applicants underwritten; some ceded along with premium; primary administers coverage
– reinsurer pays excess claims based on standard policy– losses above premiums shared pro rata
Retrospective - fam. fr. Medicaid managed care– all risk subject to reinsurance– at end of year, per-person losses above threshold & in
corridor covered under specified standards
12 Sept. 2006 ; slide 5 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
How It Works, cont’d, Policy Sketch
$0-25,000
$25K-100K
$100K+
Primary carrier pays 100%
Dollars per person year
Primary carrier pays 10%; reinsurer pays 90%
Primary carrier pays 100%
threshold
ceiling
12 Sept. 2006 ; slide 6 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
What Is the Rationale for Reinsurance?Main private goals
Financial protection, especially for small primary insurers, self-insureds– both specific and aggregate protection
Spread risk of high-cost claims– much is spread-over time thru premium
adjustments Obtain specialized knowledge, services Does not lower costs because primary carriers
must pay for reinsurance coverage
12 Sept. 2006 ; slide 7 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Rationale, cont’d
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$0-2,500 $2,500-5,000 $5,000-15,000 $15,000-30,000 $30,000-70,000 $70,000+
$Billions
% pop'n 76.5% 11.5% 9.4% 1.8% 0.7% 0.2% % $ 20.3% 15.6% 29.1% 13.6% 12.0% 9.4%
Mean $ $696 $3,555 $8,110 $20,381 $43,867 $140,617
High dollars at high end of spending per person year
note: amounts are total health expenditures by category, 2001-2003; source: survey-adjusted MEPS data
12 Sept. 2006 ; slide 8 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Rationale, cont’dPublic goals Encourage enrollment by subsidizing cost
– Reduced insurer costs reduce premiums– Add’l small 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
12 Sept. 2006 ; slide 9 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Rationale, cont’d
Rationales & design of reinsurance Specific excess-of-loss vs. aggregate Individual and small-group markets vs. all Previously uninsured vs. already insured Costs vary with size of population targeted,
generosity of public subsidy Financing by surcharges on already insured
vs. broad financing base
12 Sept. 2006 ; slide 10 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Rationale - last
Private & public compared Similarities
– similar mechanisms of risk assumption– similar claims handling
Big differences– public funds provide outside subsidy– target subsidy to neediest, the high cost– ultimate target is insured, not insurer– reinsurance only part of public reform
12 Sept. 2006 ; slide 11 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Why the Current Interest in Reinsurance?
Who Lacks Health Insurance? 45.5 million Americans in 2004 – 2 million
more than in 2002, almost all of whom lost employer-based coverage
13.75 million (30%) had middle-class incomes
Poor and near-poor need government help with subsidies; reinsurance might help middle-class workers
12 Sept. 2006 ; slide 12 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Probability of Being Uninsured
21%
32%
6%
10%
0%
5%
10%
15%
20%
25%
30%
35%
1979 2004
< median householdincome
> median householdincome
by Middle-Class Income for Adults, 1979 and 2004
12 Sept. 2006 ; slide 13 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Probability of Being Uninsured
0%
5%
10%
15%
20%
25%
30%
35%
<19 19-24 25-34 35-44 45-54 55-64 total
age group
pro
ba
bili
ty
1979
2004
by Age, 1979-2004
12 Sept. 2006 ; slide 14 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Changes in Economy
Manufacturing to service jobs – manufacturing dropped from 22% of all jobs to 11% since 1979
% of private sector workers in firms with < 50 employees increased from 37% to 43% between 1979 and 2002
Changes in employer-employee relationships – cost of health care an incentive
12 Sept. 2006 ; slide 15 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Implications of Changes
Increasingly a middle-class problem due to
changes in economy and employer-
employee relationships
We’re not going back to old economy
Need to increase access to small group and
individual insurance markets
12 Sept. 2006 ; slide 16 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Competition in Small Group and Individual Markets
Lack of perfect information causes insurers to fear 2nd risk: adverse selection
Competition takes form of how best to avoid risk or to charge higher premiums for expected higher risk
Insureds very price sensitive, often drop out BOTTOM LINE:
– Need for small group and individual coverage has never been greater
– Need is growing, especially among adults <45
12 Sept. 2006 ; slide 17 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
What’s the Evidence on Reinsurance? Private
– widely purchased, which shows it offers value Public
– NY, Healthy New York - specific, retrospective, excess-of-loss (next presentation)
– Small group reform - prospective reinsurance– AZ, Healthcare Group - aggregate retrospective– VT has reinsurance in new bill
• Expect 10-30% cut in premiums, depending on design parameters chosen
– KS & WA, perhaps others - serious planning
12 Sept. 2006 ; slide 18 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
Reinsurance Impacts Can reduce premiums for insureds, impacts of
adverse selection on insurers Can improve availability of insurance for people
now turned down Impacts, costs vary with design & current market Not panacea, but component of intervention
– Add’l subsidy needed to attract low-income workers– Other components also affect cost, accessibility of
coverage to targeted population– Add’l regulatory interventions may also be needed
12 Sept. 2006 ; slide 19 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
What is the SCI Reinsurance Institute?
SCI/AcademyHealth
Pool Admini-strators Inc.
Actuarial Research Corporation
Urban Institute HPC & Team
Consultants: Actuarial and Academic
12 Sept. 2006 ; slide 20 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
How Does this Relate to Rest of Today?
Healthy New York details and experience next
More on design issues, administration, market
issues thereafter
How Institute can help, in afternoon
12 Sept. 2006 ; slide 21 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott
The End
. . . but more to come