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High losses and low pricing are producing a year to forget for many reinsurers specializing in health risks.
Many health insurers and managed care plans have seen their losses increase this year as a result of medical expenses outstripping premiums.
Although health insurers and reinsurers are raising rates, for reinsurers it may come as too little and too late.
Reinsurers hit by health insurance losses also are looking to improve how the health reinsurance business is structured.
At least one reinsurer has responded to the tough market conditions by pulling out of a segment of the health reinsurance business.
1997 has been a "challenging year" because of the lack of profits, said Paul V. Polachek, senior vp and chief operating officer of group reinsurance and market development for CNA Insurance Cos. in Chicago. "A lot of big players in health care are having difficulty in their medical loss ratios," he said.
Francine Newman, president of CIGNA Reinsurance in Bloomfield, Conn., agreed. "It's very difficult to make money," she said. The tough market led CIGNA Re to stop writing an entire class of health reinsurance.
Because many health reinsurers write proportional business, they are being hit by losses incurred by primary health insurers, Mr. Polachek said.
Several leading health insurers, in fact, recently announced poor financial results as a result of higher claims and other unforeseen expenses. For example, Oxford Health Plans, Aetna Inc. and CIGNA Corp. have reported lower-than-expected earnings this year because of higher loss expenses.
In fact, Oxford triggered a major slide of managed care stocks late last month when it announced its accounts receivable were not being collected on time and that it expected to report a third-quarter loss. That report coincided with the massive selloff in the stock market (BI, Nov. 3). Last week, Oxford reported a third-quarter loss of $78.2 million.
Many reinsurers' fortunes are closely tied to the primary market's because under proportional treaties they take a percentage of the primary insurer's premiums and losses.
"You are walking in each other's shoes. So, if the medical carrier has reduced profits or losses, so, too, does the reinsurer," Mr. Polachek explained.
Even when reinsurers cover a self-funded employer's group health insurance plan, they still suffer from the same problems plaguing primary insurers-including higher-than-anticipated claims costs-along with similar results.
Because of the poor 1997 results, reinsurers are raising rates for both primary health insurers and self-insured employers.
Reinsurers are pushing up rates in 1998 to reverse their fortunes, while primary insurers also are increasing prices for programs that are reinsured, Mr. Polachek said.
Reinsurance rates may increase as much as 10% to 15% for some managed care plans, projected David Wilson, president of Apex Management Group Inc. in Princeton, N.J., a consultant to health care providers and reinsurers.
Even so, reinsurers are not certain that price increases will keep pace with this year's anticipated increase in claims.
There is a long lag between when a policy is written and when losses are incurred. As a result, health reinsurance pricing for 1998 won't necessarily reflect this year's full claims experience, as many claims remain unfiled and won't reach reinsurers until well into 1998.
The system "has a built-in delay" that reinsurers simply acknowledge as a part of their business, Mr. Polachek said.
Another consequence of health insurers' poor 1997 results is that reinsurers are looking to hold down costs by reducing the number of intermediaries involved, said Edmund Goodhue, president of Avandel Healthcare Inc. in Lynnwood, Wash., a new company that provides catastrophic care coverage for providers, HMOs and self-funded employers that assume risk.
Having numerous intermediaries in the reinsurance business eats away at premium dollars, he said. The parties involved can include wholesalers, an issuing insurer, managing general underwriter, a third-party administrator and a broker. He estimates that 20% of the reinsurance premium is paid to the various intermediaries.
"Each step in the food chain will have to show how it is bringing some value added," Mr. Goodhue said.
Many reinsurers want to eliminate those in the chain that don't offer value, but "it remains to be seen if the client will be served as well" by eliminating them, Mr. Wilson said.
Squeezing the various intermediaries out of the process is not as simple as it may seem, said Chris Brockett, senior vp at intermediary Towers Perrin Reinsurance in Philadelphia.
"Lots of reinsurers see them as a source of business," he said. " So if your highest priority is to grow, you don't want to shut out these potential sources of business."
Managing general agents, which produce, develop and price the risks for some reinsurers, and third-party administrators, which handle claims adjudication and settlement, can easily turn against a reinsurer trying to squeeze them out of the process and instead give the business to a competitor, Mr. Brockett explained.
Nevertheless, some reinsurers are attempting to change the incentives for MGAs that produce business.
Reinsurers prefer MGAs that have a stake in the quality of the business they generate, said CNA's Mr. Polachek. This can be accomplished by basing their commission not solely on a percentage of premiums but also partially on the profitability of the business.
CNA's philosophy is to form long-term relationships with a small number of MGAs and convince them they will earn more in the long run if CNA makes money, he explained.
Reinsurers also are becoming more active in reducing claims costs.
Traditionally, reinsurers have not investigated the claims handling of primary insurers, Mr. Wilson said.
But continuing losses have forced reinsurance companies to aggressively evaluate the business of the primary insurer, he said.
"The level of due diligence is operationally almost the same as if you're looking to actually purchase the insurer," Mr. Wilson said.
Reinsurers also are becoming more active in managing the claims and looking for loss control opportunities, agreed Ms. Newman of CIGNA Re.
In the past, reinsurers were generally passive with claims management, performing occasional claims audits to check their legitimacy, she said. Now, however, there is a greater emphasis on loss control, she said. "In the end, you will have better loss ratios," she said.
Reinsurers are beginning to require that "the risk they assume have strong managed care parts," said Mr. Goodhue of Avandel.
One health care-related area where reinsurers have been particularly hard hit is stop-loss coverage for medical providers.
Many HMOs sign agreements with doctors or hospitals to provide care for a flat fee per patient. Called capitation, this compensation model shifts financial risk to the provider. To protect themselves from medical costs that exceed their capitated payment, providers purchase stop-loss coverage, also called provider excess insurance.
Many HMOs also provide stop-loss coverage to their contracted providers and heavily reinsure those policies. The result is the bulk of any losses incurred as a result of higher medical costs is passed on to the reinsurer.
Reinsurers generally lack any control over the underlying costs of such policies.
Because providers make the decisions on treatment, they control the overall costs, said Towers Perrin's Mr. Brockett. "It's one of the few products where the insured determines the size of the claim," he said. Also, providers often have low deductibles, so a high-cost patient quickly penetrates the excess coverage, he said.
As a result of the high losses on stop-loss coverage, some reinsurance companies have left the field or are reducing the amounts they write.
Perhaps the most prominent example is CIGNA Re, which pulled out of the provider excess segment of the health reinsurance market earlier this year, said Ms. Newman.
"We felt that market was price insane," she said.
To offset losses in the U.S. health insurance market, some reinsurers are looking overseas.
Although some opportunities exist, only those that have succeeded in the U.S. market will succeed outside it, predicted Mr. Goodhue of Avandel. The rest "will find life worse overseas," he said.
"It's a great place for the very successful, highly skilled U.S. firms to go for additional opportunities," he added. "It's not a place to go for the firms looking to offset poor U.S. performance."
What attracts reinsurers to these markets is that many countries have begun privatizing their government health care systems, increasing demand for insured products. "We are seeing that virtually around the world right now," Mr. Wilson said.
Meanwhile, reinsurers specializing in life insurance risks are having a less tumultuous year.
Life reinsurance rates have been down, but that trend has existed for years.
"It seems no end is in sight," said Lawrence Rowland, president and CEO of Lincoln National Reinsurance Co. of Fort Wayne, Ind.
One reason for the drop in life reinsurance rates is that the pricing of products incorporates more risk factors of the individual policyholder, said Joseph Kolodney, senior vp at Aon Re Worldwide in Stamford, Conn. By looking at the risks of individual policyholders more closely, insurers are able to reduce rates to better reflect their lifestyles.
Despite the decline in prices, life reinsurers continue to make a steady profit, said Mr. Brockett. But the companies increasingly turn to cutting expenses and improving efficiency to maintain their earnings, he said.
Ms. Newman said that interest is growing for accumulation products, such as variable life insurance or annuities, that have an investment feature. And for these accumulation-type products, rates are steady as reinsurers can charge for product development and their expertise.
Despite the plentiful capacity, more reinsurers are looking to enter the life field, said Mr. Kolodney. They see it as a stable market, without the fluctuations in the property/casualty field. "It's a volatility diminisher," he said. "You don't have the huge volatility you have in the property/casualty business."
"It's like a hedge," he added. "They're in life reinsurance to hedge against potential volatility in the non-life business."