After PPACA: The Future of the Health Insurance Underwriter

Because current health care reform legislation limits the use of health status in underwriting and restricts actuarial pricing by age and sex, you may think that soon, there will no longer be a need for those pesky health insurance underwriters – you know, the humans you never see but who you swear are holding up your submission and catching the slightest of irrelevant missing information?

But before you get ahead of yourself, let’s review the functions of underwriting. Underwriters…

• Oversee the process of issuing insurance policies
• Manage the process that any large financial service provider (e.g., an insurer ) uses to assess whether a customer is eligible to receive its products
• Evaluate and measure risks and exposures of potential clients
• Determine the premium that needs to be charged to insure that risk

With those points in mind, even with PPACA, underwriting still has its purpose. The criteria for individual and small-group underwriting (excluding grandfathered plans) that’s effective 2014 will change, however, and focus on only four areas

• Age (3:1 rating ratio for adults using standard age bands set by Health and Human Services and the National Association of Insurance Commissioners)
• Family
• Tobacco (1.5:1 rating ratio)
• Geography (rating areas established by states and reviewed by HHS)

This aspect of reform mandates that employers up to 100 employees are considered to be in the small-group market, although states can opt to maintain their small-group markets with fewer than 50 employees in 2014 and 2015.

How is this different from what we have today?

• Health status, gender, and participation requirements will no longer be underwriting factors – not to mention that the prescribed ratios above are now uniformly mandated and regulated across the country for each carrier, in order to level the playing field.
• Including grandfathered plans, the medical loss ratio requirements (MLR) dictate that carriers must spend 80 percent of the individual and small-group markets’ (under 100) and 85 percent of the large-group market’s (100+) total revenue on claims, after factoring in risk adjustment, reinsurance, and risk corridor payments. The exceptions: HHS can make adjustments for states proving that requirements of 80 percent or higher could destabilize it. This doesn’t address the group market, however.

So what does this mean for underwriting departments and agents?

Essentially, it means that underwriters and actuaries will soon serve an even more important role, seeing as how carrier rates must be more precise to ensure that the insurance companies can operate in accordance with the guidelines, which, in effect, restrict premium. The restricted rating factors above, coupled with increased claims dollars paid out and increasing benefit consumption, equal a financial challenge of epic proportions.