1. Risk Premiums and Reinsurance
A Cyberseminar with State Officials
AcademyHealth, Washington, DC, December 6, 2006
Moderator
Enrique Martinez-Vidal
Presenter-Discussants
Randall R. Bovbjerg, The Urban Institute
Linda Blumberg, The Urban Institute
Karl E. Ideman, Pool Administrators Inc.
Katherine Swartz, Harvard School of Public Health
James W. Mays, Actuarial Research Corp.
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 1

2. Roadmap Welcome, Goals, Process Martinez-Vidal
Risk Premium - Introduction Bovbjerg
What insurers say Blumberg
Small group reform’s reinsuance Ideman
HealthyNY: role of risk premium Swartz
HealthyNY: other possible influences Mays
Wrap-up Bovbjerg
Questions and open discussion Martinez-Vidal
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 2

3. Possible Goals of Reinsurance
Public goals
Encourage enrollment by subsidizing cost
Reduced insurer costs reduce premiums
Additional impact from lower “risk premium”
Insureds/employers still contribute
Lower premium attracts more healthy insureds
Targeted subsidy; ex post risk adjustment
Reduce costs of unfavorable selection, cut benefit of cream-skimming
Help new market by assuming high, unfamiliar risk
Source: “Reinsurance 101,” slide 8, Albany presentation
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 3

4. Implementation of Reinsurance
Likely part of a reform package
other parts of HealthyNY included targeting to uninsured, slimming down benefits
Impacts also depend partly on existing environment
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 4

5. What Is “Risk Premium”
-- the extra increment of return on capital that a risk bearer demands in compensation for accepting a higher level of risk than some benchmark alternative use of capital
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 5

6. Familiar Example, Bond Interest
Market sets higher returns for worse-rated bonds
Source:
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 6

7. Health Insurance Rates
Components
Influences
Overhead costs, including:
sales, claims admin., premium taxes, other
Profit, including:
return on standard risk, plus “premium” above standard return because of add’l risks
Loading factor +
Medical losses expected
i.e., ave. claims or
“pure premium”
Benefit design, including:
cost sharing, extensiveness of benefits, mandates, openness of provider network, drug formulary
cost containment features
Enrollee characteristics, as permitted:
age, sex, medical conditions, other
Firm characteristics
Industry, region
Projection factors
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 7

8. Additional, Secondary Risks
Primary insurers’ can mis-project average claim expenses (more below)
Random variation not high for large risk pool
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 8

9. Indicators of Risk Premium
Clearly exists, see in willingness of (some) primary carriers to pay for private reinsurance
Individ. & sm. grp. loading is higher than large
Random variation and selection are both less in large groups
Risk premium is part of profit, and profits are not large
Industry sources consulted so far suggest that risk premium is not large
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 9

10. Insurer Perspective Risk premium has many components:
Catastrophic claim variance;
Provider unit cost “breakdowns”;
New therapies emerging in unknown fashion or other unanticipated changes in underlying trends;
Significant gain/loss in membership;
New product introduction;
Other nightmare creatures “under the bed”.
… but is small across a block of business
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 10

11. Small-Group-Reform Reinsurance
Reinsurance in states with small-group-market insurance reform
Spreads risk of high cost enrollees
No external subsidy
“Big players” in states with voluntary reinsurance want to opt out
Reinsurance not perceived to lower their risk enough to share costs
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 11

12. Healthy New York Experience -1
Risk premium role?
Original estimate was that the $30-100,000 corridor would reduce med. costs by 15-18% relative to same policy without reinsurance
Actual premiums were <50% of regular non-group
HMOs may have felt political pressures or reduction in risk premium was above expected cut in medical losses
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 12

13. Healthy New York Experience - 2
Other considerations?
Favorable selection, i.e., lower-risk enrollees from among previously uninsured
Merging of premium rates for small group and individual coverages
Trimmed benefit package of HNY
Reduced private reinsurance premiums
Relevance of observed loss ratio shifts after reinsurance shift
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 13

14. Wrap up Risk premium exists
Its size is not clearly established from theory or prior experience
what will matter in a new state is what participating primary insurers believe, then observe about risks
size(s) of participating insurer(s) also relevant
Project is seeking out more information
HealthyNY, nature of variation within our cost model, opinions of experts, market participants
Cyberseminar, Reinsurance Inst.
6 Dec ; slide 14

15. The End . . . Time for questions Cyberseminar, Reinsurance Inst.
6 Dec ; slide 15