If the health plan reinsurance market outlook for 2009 were to be described in meteorological terms, it would be “dark clouds with isolated thunderstorms, but skies clearing later in the year.”
The dark clouds currently hanging over the health plan reinsurance market-in fact over the entire global insurance industry-is evidenced in the liquidity strain faced by AIG, the world’s largest insurer.
While it is unlikely (though not impossible) that other major insurers will face financial calamity, we will almost certainly see additional mergers and consolidation in the industry. In the accident and health reinsurance market, the shakeout really began several years ago. A number of players, seeking higher returns on capital, exited the industry, significantly reducing capacity.
The recent national credit meltdown has had two key impacts thus far. First, rating agencies and regulators are subjecting reinsurers and health insurers alike to much greater scrutiny. Second, many health plans have experienced their own capital decrease and are carefully revaluating their balance sheets. The plans, along with many other companies and investment funds, are seeking to de-risk their finances on both the asset and liability side of the ledger.
For health insurance plans this often means a closer analysis of medical cost trends and reducing their exposure to catastrophic claims. In the past 6 months we have seen a significant number of health plans that were previously self-insured buying reinsurance for the first time.
Other plans are restructuring their coverage; in most cases removing internal limits and increasing maximums. For example, many reinsurance policies might carry limits of $4,000 to $10,000 per day for hospitalization and a $1 million cap overall per member. Ten years ago, this approach was not totally inappropriate, but no longer. Not only has claims severity increased dramatically, the treatment location is increasingly moving outside the hospital and into outpatient settings and patients’ homes.
A recent study by Evergreen Re was completed in conjunction with Ingenix/Reden & Anders, Minneapolis. The study found that the frequency of members with paid claims greater than $1 million per 100,000 commercial members rose from 0.07 in the year 2000 to 1.1 in 2005, and will increase to 2.4 (low trend) and possibly 3.6 (high trend) by 2010.
In addition, members with paid claims greater than $2 million, once virtually unheard of, are presenting with increasing frequency. The Evergreen Re study found that the rate of $2 million claims per million commercial members rose from 1.1 in 2006 to 1.7 in 2007, an increase of 55% in one year. Frequency is projected to increase to 1.9 or higher (as high as 7.0, if we were to assume 11% annual trend) by 2010.
What’s driving these huge claims?
The four largest sources of $1 million plus claims are premature babies/infants, organ transplants, cardiovascular disease, specialty drug therapies and cancer treatment.