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Actuaries see more risk inside small stop-loss issuers

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Actuaries are doing research that could eventually lead to somewhat tougher capital standards for small issuers of the stop-loss insurance arrangements used with funded employer health plans.

Members of the Health Risk-Based Capital Working Group, part of the Kansas City, Missouri-based National Association of Insurance Commissioners, talked about stop-loss issuer results Sunday, during a session at the NAIC’s meeting in Miami Beach, Florida.

The working group will be asking for public comments on a proposal to set capital requirements a little higher for stop-loss insurance issuers with less than $25 million in annual premiums and a little lower for stop-less premium revenue over $25 million, according to a meeting summary posted on the working group’s section of the NAIC website.

Employers that want to use their own assets to back health plans can buy stop-loss, or insurance for insurance plans, to limit their risk.

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Insurance regulators use the risk-based capital ratio system, or a set of mathematical formulas, to try to estimate how prepared an insurer is to pay its obligations, given the types of assets the insurer has, how stable those assets seem to be, the types of obligations the insurer might have to pay, and how predictable the obligations seem to be.

ACA benefits limit ban

In the 2009, the NAIC asked the Washington-based American Academy of Actuaries, a group that gives government agencies and other policymakers advice about math and statistics, to take a look at the NAIC’s risk-based capital formulas for employer stop-loss insurance arrangements and similar arrangements, such as reinsurance for health maintenance organizations.

The academy’s Stop Loss Factors Work Group decided to focus on the employer stop-loss market because data for other, similar types of arrangements was to scarce, according to a report included in the Health Risk-Based Capital Working Group’s meeting packet.

Regulators have been asking health stop-loss issuers to multiply all health stop-loss premiums by a factor of 25 percent when adding stop-loss business to their risk-based capital ratios.

The academy actuaries looked at self-funded stop-loss data for 1998 through 2008. The actuaries found that losses for stop-loss issuers with relatively low levels of stop-loss revenue were much more variable than losses for issuers with bigger blocks.

The actuaries are thinking about setting the risk-based capital multiplication factor at 35 percent for health stop-loss revenue under a $25 million “break point,” and at 25 percent for revenue over the $25 million break point.

Drafters of the Patient Protection and Affordable Care Act of 2010, part of the Affordable Care Act package, included a provision that prohibits health insurers and self-insured plans from imposing annual or lifetime limits and benefits for any essential health benefits, or core medical services, that a plan covers.

When regulators started to phase in the benefits limit ban, stop-loss issuers said they were not sure how it would affect them.

In the stop-loss risk-based capital report included in the working group packet, the academy actuaries do not include any data on business affected by the ban. But the actuaries say they added 5 percentage points to both the proposed first-tier risk-based capital multiplication factor and the second-tier factor to reflect the volatility that the benefits limit ban could add.

Without the adjustment for the ACA benefits limit ban, the first-tier risk-based capital multiplication factor, for premiums under the $25 million break point, would have been 30 percent, and the second-tier factor, for premiums over the break point, would have been 20 percent.


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