Transcript Stop Loss – Current Market Trends

SIIA 30th Annual National Educational
Conference
An Independent View of the Stop Loss
Market Today
October 14, 2010
Presented by:
Alison J. Saifer, FSA, MAAA
AMS
Actuarial
Management
Strategies, Inc.
Copyright and Disclaimer
This presentation is for informational and discussion
purposes. All material contained within this presentation
is believed to be reliable and is based upon market
experience and knowledge of Actuarial Management
Strategies, Inc. (“AMS”). AMS does not certify to its
accuracy or completeness. This document and its
contents are proprietary to AMS and may not be copied
or reproduced without the express consent of AMS.
Background: Alison J. Saifer, FSA, MAAA

Health Care Consultant (Actuarial/Financial/Business) for:

Reinsurance Companies
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Direct Carriers
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MGUs
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Attorneys

Investors
Recent Experience

Review Approximately $1 Billion in Stop Loss
Experience per Year

Perform 8 – 10 Employer Stop Loss Program Audits per
Year for a Variety of Different Clients

Perform Facultative Underwriting for Large Cases
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Program Underwriter for Reinsurance Companies

Annual Detailed Review of Most Popular Medical Stop
Loss Manual

Expert Witness Work for Employer Stop Loss Deals
Gone Bad

Stop Loss Program Reviews for Financial Investors
Overview Employer Stop Loss Market

State of the Employer Stop Loss Market
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STILL a soft market cycle
Existing and new capacity continue to seek growth or maintain
market share
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Signs of softening aggregates
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Most programs are not meeting profit objectives
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Blues and Direct carriers continue to increase market share
State of the Employer Stop Loss Market

Large Profits Achieved in Early 2000’s are History

2004 Small Profits or Losses by Many Carriers
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2005 – 2006 Market Shifts from Hard Market
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2007 - 2010 Market Gets More Competitive Each Year

1/1’s – Still No Sign of Hardening Market
Recent Market Cycles
Hard Market
1997
1998
1999
2001
2000
2003
2002
2005
2004
Soft Market
2006
2007
2009
2008
2010
Previous Optimism Hasn’t Panned Out

According to a Special Report Issued by A.M. Best in
October 2006, “Medical Stop Loss Market May Show
Signs of Hardening in 2007”
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Reinsurers exiting the market
Consolidation with insurers purchasing MGUs (i.e. HCC
purchasing Perico in 2005 and Allianz’s U.S. Health Products
Division)
Increasing loss ratios will result in more conservative
underwriting and higher prices
But the MGU/Reinsurance Market is a Smaller Piece and
No Longer Driving the Market
Existing and New Capacity Seeking Growth

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Many Insurers/Reinsurers Still Have an Appetite for
this Class
Some Players Believe that Health Care Reform will
Result in New Opportunity for Stop Loss
Some New Players
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Start-up MGUs
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Xchange Benefits
New/Expanded Insurance/Reinsurance capacity
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RGA
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Beazley
Market Shifts
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Munich Re America
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Acquires Cairnstone in 2007 ($80 million)

2007 Non-renews 4 MGU stop loss partners (>$100 million)
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Reduction in staff managing stop loss
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2009 once again expands by partnering with MGU markets
Berkley

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Key Reduction in Staff in 2007/2008, then in 2009 Expands Staff Again
Dedicated to Writing Stop Loss, Including Hiring a New President from
Sun Life with Significant Stop Loss Experience
Companion Purchases:

Montgomery Management Corporation in 2007

International Specialty Underwriters in 2008
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International Insurance Services, Inc. in 2009
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Summit Reinsurance Services Inc. in 2010
Market Shifts (cont’d)

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Several BCBS Plans are Looking at Expanding Stop Loss
Market
Chubb Exits the Direct Division, but Stays in the Market
Through Partners
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CV Starr Exits the Stop Loss Market, but new MGUs Springing up
from ex-CV Starr staff (apparently with paper and reinsurance
support)
HM Insurance Group Acquires Mutual of Omaha’s Stop
Loss Block ($100 million)
Principal Financial Group Exits Self-Funded Medical with
UnitedHealthcare Offering Renewal Policies
BCBS in Stop Loss

According
to
MyHealthGuide
a
Recent
Article
Published
in
“As of June 30, 2009 Blues plans and their affiliates
insured 102.3 million people through major medical
plans… More than half of the Blues aggregate
membership is through self-funded or administrative
services only (ASO) plans.”

State Specific Blues Discounts and BlueCard make
Claims Costs Lower than Most Competitors, with
the Ability to Offer Lower Cost Coverage on a
National Basis
Catastrophic Claims


Catastrophic Claims are Getting Larger
Catastrophic Claims are Occurring with Increasing
Frequency

Health care reform will escalate both frequency and severity
by removing maximums

Providers are known to manage to maximums for catastrophic
claims
Catastrophic Claims are on the Rise

According to a Presentation by Summit Re at ASNY in
November 2009:
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Average size of claims over $1 million
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2005 – about $1,200,000
2008 – about $1,475,000
Probability of a claim over $1 million
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2002 - <.00002
2005 – about .00003
2008 – almost .00007
Mid-Size Claims on the Rise

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The Increase in Large Claims has Been Discussed for
Years. But the News with Mid-Sized Claims Isn’t Any
Better.
According to Munich Re America HealthCare Fall 2009
Newsletter:

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
Between 2004 and 2008, the number of claims has increased
50% at the $50,000 level and 80% at the $250,000 level.
Claims greater than $50,000 now make up more than 25% of
the total average claim cost.
Impacts stop loss trend!!!!
Catastrophic Claims

How High Can Charges Get? HCR Has Not Addressed the Cost Side
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How to Price When Limits Have Historically Been Less
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Add Cat charge
Ignore extra cost, because don’t believe it will happen
Add extra cost, but reduce price with discretion
Major “Cat” Events of Past 10 Years Have Had Minimal Impact on ESL
Experience
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$5 million limit implies approximately $13,700/day x 365 days
Charges in NJ average $12,000 - $15,000 per day
Luck?
Losses also constrained with policy limits
It’s still not in the experience!
Eventually There Will Be Impact

2011 may be small enough not to worry about
Underwriting is Too Aggressive
Today’s Market:
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Increased Competition on Lasers

No laser or no laser at renewal policies are becoming common

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Large PPO Discounts Plus Underwriting Discretion
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Necessary to compete with BUCAs which have increasing share of the market
Other Discounts Available
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Additional costs for this product are being lost due to competition
Health Management programs have been certified for a 10% discount on specific
stop loss coverage
Competition on Aggregate Attachment Points
Early Lock-In of Rates
Some Companies Have “You First” Attitude, Waiting for Competition to Act
More Responsibly in Rating
Many Companies Trying to Figure Out How Heath Care Reform Will Impact
Stop Loss
Competition on Aggregate
Attachment Points

Low Premium Will Not Absorb Claims

Supposed to be Sleep Coverage
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Some players are pricing to a loss ratio
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Agents/Brokers are Selling on Aggregate Attachment
Point as Well as Specific Premium and Lasers

This Year More Aggregate Activity is Apparent in Audit

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Do We Remember the Underwriting Mistakes from the
Late 1990’s?
BUCAs can Afford Lower Attachment Points as Their
Claim Costs are Lower
What to Watch for on Aggregate
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As Underwriting Loosens on Lasers, Consider Potential
Specific Claims Compared to Historic Number of Specific
Claims Which Will Affect the Accumulation
Health Care Reform May Impact, including Eliminating
Cost Sharing for Preventative, Removal of Pre-Ex,
Elimination of ER Pre-Cert Penalties, etc.
Evidence that in the Past Years, First Dollar Trend is
Materially Lower for HDHP, as Consumers Make Cost
Conscious Decisions for First Dollar Care

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May reduce aggregate attachment points
PWC estimates 2.5% lower trend
CIGNA states their CDHP experience ½ the trend of HMO and PPO
Won’t last forever – enrollment is still low with positive selection
and short term effect – people will still get sick
Trend

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First Dollar Trend has Been Relatively Consistent Over the
Past Few Years
2010 Segal Health Plan Cost Trend Survey
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Aon Summer 2010 Health Care Trend Survey
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PPO Medical + Rx – 2010 trend – 10.7%
PriceWaterhouseCoopers Healthcare Cost Trends for 2010
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PPO Medical + Rx Projected 2010 trend – 10.5%
All Plan Type Overall Projected 2010 trend – 9.0%
But Leveraged Trend has Changed with Reverse
Leveraging Occurring in Some Instances
Trend in Underwriting
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Most are Not Getting Trend (or Leveraged Trend for
Specific!) at Writing or Renewal

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Many are Not Using Actual Trend in Aggregate
Attachment Points
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Some who are getting trend in prices, off-set with getting too
aggressive on lasers
One trend does not fill all!
Some Industry Manuals are Not Increasing by Leveraged
Trend From Year to Year
Health Care Reform and Stop Loss

Does Not Appear that HCR Will Affect Stop Loss for:
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Minimum loss ratios
Lasering, disclosure requirements, medical underwriting
Does Appear that HCR Will Affect Stop Loss for:
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Cover on family until age 26
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No lifetime maximums
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track composition of family and average number of people covered
Some Stop Loss carriers have announced (and many have
implemented) intention to revise stop loss policies to increase plan
maximums including no limit options
Potential explosion of high cost claims when limits are increased or
removed
No rescissions
Qualify for early retiree pool
Health Care Reform and Stop Loss
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Other Things to Consider
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Mandated coverage for biological Rx
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Employer must report value of coverage
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Clinical trial exposure
Market Size – Health Care Reform
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No Consensus on How Health Care Reform will Impact
Total Size of the Stop Loss Market
Some Believe that HCR will Increase the Size of the
Market as Employers with Higher than Average Paid
Employees Attempt to Keep Control of Health Care Costs

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These employees will not qualify for subsidies on the exchange
May open opportunity for new/expanded product innovation,
such as limited medical to fill some gaps and specialty carve-out
products to limit employer exposures
Very Large Employers will buy Stop Loss for the First
Time due to Unlimited Benefits and Increased Liability for
Catastrophic Claims
Market Size – Health Care Reform (cont’d)

Others Believe that HCR will Decrease the Size of the
Market as Reporting and Tracking Requirements for
the Employers Become More Burdensome

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Lower paid employees will have incentive to move to
exchanges
Fees on Self-insured plans
Presentation by Milliman saying they believe 10 – 20% of
employers will move out of self-funded plans
Other Potential Changes to Market
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Transparency in Costs – Administration and Brokerage
Taken Out of “Insurance Costs”
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Pressure on Providers for Transparency May Reduce the
Differential by Network (Consumer Driven)
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Already happening
No material effect yet
Poor Results for Risk-Takers May Potentially Slightly
Reduce Capacity
Continued Consolidation
Chaos Breeds Opportunity

How to Get New Groups or Keep Existing Groups
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Be prepared to help with administrative burdens for reporting
by group
Discount, discount, discount
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Low expenses

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Without low claim costs, will not be able to compete
Directs operate at low expenses and leverage administrative
services. Take administration and commission out of premium
Specialty carve-outs may reduce employers first dollar
aggregate risks
Thank You !
Alison J. Saifer, FSA, MAAA
President
[email protected]
(215) 862-8390
AMS
Actuarial
Management
Strategies, Inc.
www.actmgmt.com