SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 1 Bovbjerg-Swartz, Reinsur 101 Reinsurance 101 Presentation to Reinsurance Institute’s Kick-Off

12 Sept. 2006 ; slide 1 Bovbjerg-Swartz, Reinsur 101 SCI Reinsur Inst, Albany Marriott

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


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?


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)


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


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


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


Rationale, cont’d

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$0-2,500 $2,500-5,000 $5,000-15,000 $15,000-30,000 $30,000-70,000 $70,000+

$Billions

% pop'n 76.5% 11.5% 9.4% 1.8% 0.7% 0.2% % $ 20.3% 15.6% 29.1% 13.6% 12.0% 9.4%

Mean $ $696 $3,555 $8,110 $20,381 $43,867 $140,617

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


Rationale, cont’dPublic 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


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


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


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


Probability of Being Uninsured

21%

32%

6%

10%

0%

5%

10%

15%

20%

25%

30%

35%

1979 2004

< median householdincome

> median householdincome

by Middle-Class Income for Adults, 1979 and 2004


Probability of Being Uninsured

0%

5%

10%

15%

20%

25%

30%

35%

<19 19-24 25-34 35-44 45-54 55-64 total

age group

pro

ba

bili

ty

1979

2004

by Age, 1979-2004


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


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


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


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


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


What is the SCI Reinsurance Institute?

SCI/AcademyHealth

Pool Admini-strators Inc.

Actuarial Research Corporation

Urban Institute HPC & Team

Consultants: Actuarial and Academic


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


The End

. . . but more to come

Documents

SCI Reinsur Inst, Albany Marriott 12 Sept. 2006 ; slide 1 Bovbjerg-Swartz, Reinsur 101 Reinsurance 101 Presentation to Reinsurance Institute’s Kick-Off