An Alabama regulator says officials will have to balance the interests of insurers and consumers when deciding how reserve requirements should account for possible fluctuations in claims.

Steve Ostlund, chair of the Accident and Health Working Group at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., has discussed that issue in a memorandum written to help give other officials at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., technical advice about the “credibility” issue.

In insurance, “credibility” is a measure of how adequate the claims data available might be at helping users predict future claim volume.

The working group and other arms of the NAIC have been working on efforts to implement the minimum medical loss ratio (MLR) provisions in the Patient Protection and Affordable Care Act (PPACA), a component of the Affordable Care Act.

The provisions will require that the portion of revenue going to medical care and quality improvement efforts by 80% for individual and small group coverage and 85% for large plans.

Insurers and plans that miss the mark are supposed to provide rebates.

Insurers, individuals who represent consumers in NAIC proceedings, and others have been talking about how to handle reserve requirements in the minimum MLR and rebate calculations.

States often require insurers to hold reserves that appear to be high enough to handle variance about 90% of the time, and regulators involved in setting the minimum MLR standards have talked about setting the confidence interval at 50%, Ostlund says.

The people working on the minimum MLR proposal want

to “balance the desire to not require rebates based upon stochastic variance against the desire to not invite abuse of the provision,” Ostlund says. “The use of any level of credibility standards will still result in an experienced MLR greater than the statutory standard, (except for the obvious 100% level which would entirely eliminate rebates for the smaller issuers). “

The confidence interval chosen should eliminate about two-thirds of the payments due to variance rather than 95% or more, Ostlund says.

“In essence, the use of the 50% standard allows the consumer to share the gain from some of the variance a company will experience,” Ostlund says. “There is no ‘right’ answer.”

The people who have proposed that standard have not chosen the “wrong” factors, but, instead, have made a choice to balance interests of consumers and issuers, Ostlund says.

“To choose a higher confidence level would invite criticism from consumers and other regulators that the proposed regulation is unbalanced in favor of insurance companies,” Ostlund says.