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Risk Premiums and Reinsurance

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Presentation on theme: "Risk Premiums and Reinsurance"— Presentation transcript:

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


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