Reinsurance 101

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Reinsurance 101
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

• Presentation to Reinsurance Institutes Kick-Off
  Meeting with States, Albany Marriott, NY,
  Tuesday, September 12, 2006

standard disclaimer applies
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Roadmap

1. What is reinsurance?
2. How does reinsurance work?
3. What is the rationale for reinsurance?
4. Why the current interest in reinsurance?
5. Whats the evidence on reinsurance?
6. What is the SCI Reinsurance Institute?
7. How does this presentation relate to the rest of
   today?

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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)

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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

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How It Works, contd, Policy Sketch
Dollars per person year
Primary carrier pays 100
Primary carrier pays 10 reinsurer pays 90
Primary carrier pays 100
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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

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Rationale, contd
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
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Rationale, contd

• Public goals
• Encourage enrollment by subsidizing cost
• Reduced insurer costs reduce premiums
• Addl 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

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Rationale, contd

• 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

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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

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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

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Probability of Being Uninsured
by Middle-Class Income for Adults, 1979 and 2004
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Probability of Being Uninsured
by Age, 1979-2004
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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 lt 50
  employees increased from 37 to 43 between 1979
  and 2002
• Changes in employer-employee relationships cost
  of health care an incentive

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Implications of Changes

• Increasingly a middle-class problem due to
  changes in economy and employer-employee
  relationships
• Were not going back to old economy
• Need to increase access to small group and
  individual insurance markets

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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 lt45

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Whats 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

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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
• Addl subsidy needed to attract low-income
  workers
• Other components also affect cost, accessibility
  of coverage to targeted population
• Addl regulatory interventions may also be needed

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What is the SCI Reinsurance Institute?
SCI/AcademyHealth
Urban Institute HPC Team
Pool Admini-strators Inc.
Actuarial Research Corporation
Consultants Actuarial and Academic
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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

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The End
. . . but more to come