1. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 1 Bovbjerg-Swartz, Reinsur 101 Reinsurance 101 Presentation to Reinsurance Institute’s Kick-Off Meeting with States, Albany Marriott, NY, Tuesday, September 12, 2006 Randall R. Bovbjerg, J.D. (Bó - berg) Principal Research Assoc., Urban Institute, † PI for UI Reinsurance Inst.Team Katherine Swartz, Ph.D. Harvard School of Public Health † Expert Consultant for UI Reinsurance Inst.Team † standard disclaimer applies

2. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 2 Bovbjerg-Swartz, Reinsur 101 Roadmap I.What is reinsurance? II.How does reinsurance work? III.What is the rationale for reinsurance? IV.Why the current interest in reinsurance? V.What’s the evidence on reinsurance? VI.What is the SCI Reinsurance Institute? VII.How does this presentation relate to the rest of today?

3. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 3 Bovbjerg-Swartz, Reinsur 101 What Is Reinsurance?  Insurance for insurers (or other large risk bearers)  Vocabulary: –the primary risk bearer cedes (transfers) the risk –the reinsurer assumes the risk –transfer may be prospective or retrospective –risk sharing may be proportional, akin to coinsurance (a.k.a. pro rata), or excess of loss, akin to deductible (a.k.a. above threshold or attachment point), or a mix of both –risk sharing typically has ceiling, creating risk corridor –may be specific (per insured person per year) or aggregate (for whole line of coverage)

4. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 4 Bovbjerg-Swartz, Reinsur 101 How Does Reinsurance Work?  Invisible to insured people, operates entirely between primary carrier and reinsurer  Prospective - familiar from small group reform –applicants underwritten; some ceded along with premium; primary administers coverage –reinsurer pays excess claims based on standard policy –losses above premiums shared pro rata  Retrospective - fam. fr. Medicaid managed care –all risk subject to reinsurance –at end of year, per-person losses above threshold & in corridor covered under specified standards

5. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 5 Bovbjerg-Swartz, Reinsur 101 How It Works, cont’d, Policy Sketch $0-25,000 $25K-100K $100K+ Primary carrier pays 100% Dollars per person year Primary carrier pays 10%; reinsurer pays 90% Primary carrier pays 100% threshold ceiling

6. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 6 Bovbjerg-Swartz, Reinsur 101 What Is the Rationale for Reinsurance? Main private goals  Financial protection, especially for small primary insurers, self-insureds –both specific and aggregate protection  Spread risk of high-cost claims –much is spread-over time thru premium adjustments  Obtain specialized knowledge, services  Does not lower costs because primary carriers must pay for reinsurance coverage

7. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 7 Bovbjerg-Swartz, Reinsur 101 Rationale, cont’d High dollars at high end of spending per person year note: amounts are total health expenditures by category, 2001-2003; source: survey-adjusted MEPS data

8. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 8 Bovbjerg-Swartz, Reinsur 101 Rationale, cont’d Public goals  Encourage enrollment by subsidizing cost –Reduced insurer costs reduce premiums –Add’l small 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

9. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 9 Bovbjerg-Swartz, Reinsur 101 Rationale, cont’d Rationales & design of reinsurance  Specific excess-of-loss vs. aggregate  Individual and small-group markets vs. all  Previously uninsured vs. already insured  Costs vary with size of population targeted, generosity of public subsidy  Financing by surcharges on already insured vs. broad financing base

10. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 10 Bovbjerg-Swartz, Reinsur 101 Rationale - last Private & public compared  Similarities –similar mechanisms of risk assumption –similar claims handling  Big differences –public funds provide outside subsidy –target subsidy to neediest, the high cost –ultimate target is insured, not insurer –reinsurance only part of public reform

11. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 11 Bovbjerg-Swartz, Reinsur 101 Why the Current Interest in Reinsurance? Who Lacks Health Insurance?  45.5 million Americans in 2004 – 2 million more than in 2002, almost all of whom lost employer-based coverage  13.75 million (30%) had middle-class incomes  Poor and near-poor need government help with subsidies; reinsurance might help middle-class workers

12. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 12 Bovbjerg-Swartz, Reinsur 101 Probability of Being Uninsured by Middle-Class Income for Adults, 1979 and 2004

13. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 13 Bovbjerg-Swartz, Reinsur 101 Probability of Being Uninsured by Age, 1979-2004

14. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 14 Bovbjerg-Swartz, Reinsur 101 Changes in Economy  Manufacturing to service jobs – manufacturing dropped from 22% of all jobs to 11% since 1979  % of private sector workers in firms with < 50 employees increased from 37% to 43% between 1979 and 2002  Changes in employer-employee relationships – cost of health care an incentive

15. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 15 Bovbjerg-Swartz, Reinsur 101 Implications of Changes  Increasingly a middle-class problem due to changes in economy and employer- employee relationships  We’re not going back to old economy  Need to increase access to small group and individual insurance markets

16. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 16 Bovbjerg-Swartz, Reinsur 101 Competition in Small Group and Individual Markets  Lack of perfect information causes insurers to fear 2nd risk: adverse selection  Competition takes form of how best to avoid risk or to charge higher premiums for expected higher risk  Insureds very price sensitive, often drop out  BOTTOM LINE: –Need for small group and individual coverage has never been greater –Need is growing, especially among adults <45

17. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 17 Bovbjerg-Swartz, Reinsur 101 What’s the Evidence on Reinsurance?  Private –widely purchased, which shows it offers value  Public –NY, Healthy New York - specific, retrospective, excess-of-loss (next presentation) –Small group reform - prospective reinsurance –AZ, Healthcare Group - aggregate retrospective –VT has reinsurance in new bill Expect 10-30% cut in premiums, depending on design parameters chosen –KS & WA, perhaps others - serious planning

18. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 18 Bovbjerg-Swartz, Reinsur 101 Reinsurance Impacts  Can reduce premiums for insureds, impacts of adverse selection on insurers  Can improve availability of insurance for people now turned down  Impacts, costs vary with design & current market  Not panacea, but component of intervention –Add’l subsidy needed to attract low-income workers –Other components also affect cost, accessibility of coverage to targeted population –Add’l regulatory interventions may also be needed

19. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 19 Bovbjerg-Swartz, Reinsur 101 What is the SCI Reinsurance Institute? SCI/AcademyHealth Pool Admini- strators Inc. Actuarial Research Corporation Urban Institute HPC & Team Consultants: Actuarial and Academic

20. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 20 Bovbjerg-Swartz, Reinsur 101 How Does this Relate to Rest of Today?  Healthy New York details and experience next  More on design issues, administration, market issues thereafter  How Institute can help, in afternoon

21. SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 21 Bovbjerg-Swartz, Reinsur 101 The End... but more to come