Reinsurance for the NJ Market

1
Reinsurance for the NJ Market

• R. Neil Vance
• NJ DOBI
• July 19, 2007

2
NJ Commercial Health Market2005

• 2.5 million people
• 8.95 bb premium
• 7.31 bb claims
• 81.7 medical loss ratio
• Three largest carriers 80 of market
• Est. Underwriting gain 4.0 of premium

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NJ Reform Mkts (SEH, IHC)

• Voluntary Commercial Carriers
• Guaranteed Issue (if eligible)
• No health rating (pre-ex permitted)
• Modified or pure community rating
• 75 loss ratio requirement w. refunds
• Standardized benefits (riders in SEH)
• No reinsurance (except IHC assessment)

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Small Employer (SEH)

• Enrollment of 900,000 (over 10 of pop.)
• Average loss ratio of 80
• Average underwriting gain of 3
• Six major carriers
• Average contract size of 4 employees
• Employer participation above nat. average
• Rate by age/gender/territory w. 21 limit

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Individual (IHC)

• Enrollment 80,000 (inc. 20,000 in BE)
• Standard Plans are pure community rated
• BE Plans have lower benefits and riders
• BE Plans rated age/gender/terr 3.51
• Ave. Loss Ratio 85 in 2005
• High Average Premiums

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AHIP Study (2005)

• 2004 Ind Rates
  NJ 500/mo CA 155/mo
• Current 470/mo for 30 HMO
• Current 150-200/mo for age rated BE
• These rates are available to anyone, not just the
  healthy
• NJ SEH market is also guaranteed issue

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Why Reins in NJ Market?

• Carriers must accept high cost people
• This increases average premiums
• Increased average premiums lead to adverse
  selection
• This can start a selection spiral
• Externally funded reinsurance can avert a
  selection spiral

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Example of a Reins Program

• Automatic, everyone covered is reinsured
• All benefit plans are covered
• Specific stop-loss with high attachment point (eg
  100,000) and coinsurance (90)
• No reinsurance maximum
• Low subsidy per person low impact on
  affordability

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Combined Mkt/Reins (1)

• Combine IHC into SEH market
• Reduces individual rates 30 ave increases group
  rates 1 ave (Mercer)
• Increases enrollment by 100,000 to total of 1.1
  million (Mercer)
• Impact from lower average rate and age rating for
  individuals

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Combined Mkt/Reins (2)

• Specific Stop Loss Reins (e.g.100K/90)
• Cost in the 150mm - 200 mm range (Mercer)
• Reduce small group rates 3 - 4 (Mercer)
• Increase enrollment by an additional 5,000
• Additional effects reduced cost of capital, rate
  stability, new market entrants
• Other reinsurance designs are possible

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Reins. in Context of Reform

• Excess of Loss Reinsurance socializes large
  claims
• Everyone is able to buy coverage at standard
  rates
• Does not address the problem of affordability of
  standard rate
• More comprehensive and expensive programs are
  probably necessary