SIIA 30th Annual National Educational Conference

An Independent View of the Stop Loss Market Today

October 14, 2010

Actuarial Management Strategies, Inc.AMS

Presented by: Alison J. Saifer, FSA, MAAA

Copyright and Disclaimer

This presentation is for informational and discussion purposes. All material contained within this presentation is believed to be reliable and is based upon market experience and knowledge of Actuarial Management Strategies, Inc. (“AMS”). AMS does not certify to its accuracy or completeness. This document and its contents are proprietary to AMS and may not be copied or reproduced without the express consent of AMS.

Background: Alison J. Saifer, FSA, MAAA

Health Care Consultant (Actuarial/Financial/Business) for:

Reinsurance Companies

Direct Carriers

MGUs

Attorneys

Investors

Recent Experience

Review Approximately $1 Billion in Stop Loss Experience per Year

Perform 8 – 10 Employer Stop Loss Program Audits per Year for a Variety of Different Clients

Perform Facultative Underwriting for Large Cases Program Underwriter for Reinsurance Companies Annual Detailed Review of Most Popular Medical

Stop Loss Manual Expert Witness Work for Employer Stop Loss

Deals Gone Bad Stop Loss Program Reviews for Financial Investors

Overview Employer Stop Loss Market

State of the Employer Stop Loss Market

STILL a soft market cycle

Existing and new capacity continue to seek growth or maintain market share

Signs of softening aggregates

Most programs are not meeting profit objectives

Blues and Direct carriers continue to increase market share

State of the Employer Stop Loss Market

Large Profits Achieved in Early 2000’s are History

2004 Small Profits or Losses by Many Carriers

2005 – 2006 Market Shifts from Hard Market

2007 - 2010 Market Gets More Competitive Each Year

1/1’s – Still No Sign of Hardening Market

Recent Market Cycles

Hard Market

Soft Market

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Previous Optimism Hasn’t Panned Out

According to a Special Report Issued by A.M. Best in October 2006, “Medical Stop Loss Market May Show Signs of Hardening in 2007”

Reinsurers exiting the market

Consolidation with insurers purchasing MGUs (i.e. HCC purchasing Perico in 2005 and Allianz’s U.S. Health Products Division)

Increasing loss ratios will result in more conservative underwriting and higher prices

But the MGU/Reinsurance Market is a Smaller Piece and No Longer Driving the Market

Existing and New Capacity Seeking Growth

Many Insurers/Reinsurers Still Have an Appetite for this Class

Some Players Believe that Health Care Reform will Result in New Opportunity for Stop Loss

Some New Players Start-up MGUs

Xchange Benefits

New/Expanded Insurance/Reinsurance capacity RGA Beazley

Market Shifts

Munich Re America Acquires Cairnstone in 2007 ($80 million) 2007 Non-renews 4 MGU stop loss partners (>$100 million) Reduction in staff managing stop loss 2009 once again expands by partnering with MGU markets

Berkley

Key Reduction in Staff in 2007/2008, then in 2009 Expands Staff Again Dedicated to Writing Stop Loss, Including Hiring a New President from Sun Life with Significant Stop Loss Experience

Companion Purchases: Montgomery Management Corporation in 2007 International Specialty Underwriters in 2008 International Insurance Services, Inc. in 2009 Summit Reinsurance Services Inc. in 2010

Market Shifts (cont’d) Several BCBS Plans are Looking at Expanding Stop

Loss Market

Chubb Exits the Direct Division, but Stays in the Market Through Partners

CV Starr Exits the Stop Loss Market, but new MGUs Springing up from ex-CV Starr staff (apparently with paper and reinsurance support)

HM Insurance Group Acquires Mutual of Omaha’s Stop Loss Block ($100 million)

Principal Financial Group Exits Self-Funded Medical with UnitedHealthcare Offering Renewal Policies

BCBS in Stop Loss

According to a Recent Article Published in MyHealthGuide

“As of June 30, 2009 Blues plans and their affiliates insured 102.3 million people through major medical plans… More than half of the Blues aggregate membership is through self-funded or administrative services only (ASO) plans.”

State Specific Blues Discounts and BlueCard make Claims Costs Lower than Most Competitors, with the Ability to Offer Lower Cost Coverage on a National Basis

Catastrophic Claims

Catastrophic Claims are Getting Larger Catastrophic Claims are Occurring with

Increasing Frequency Health care reform will escalate both frequency and

severity by removing maximums Providers are known to manage to maximums for

catastrophic claims

Catastrophic Claims are on the Rise

According to a Presentation by Summit Re at ASNY in November 2009:

Average size of claims over $1 million 2005 – about $1,200,000 2008 – about $1,475,000

Probability of a claim over $1 million 2002 - <.00002 2005 – about .00003 2008 – almost .00007

Mid-Size Claims on the Rise

The Increase in Large Claims has Been Discussed for Years. But the News with Mid-Sized Claims Isn’t Any Better.

According to Munich Re America HealthCare Fall 2009 Newsletter:

Between 2004 and 2008, the number of claims has increased 50% at the $50,000 level and 80% at the $250,000 level.

Claims greater than $50,000 now make up more than 25% of the total average claim cost.

Impacts stop loss trend!!!!

Catastrophic Claims

How High Can Charges Get? HCR Has Not Addressed the Cost Side

$5 million limit implies approximately $13,700/day x 365 days Charges in NJ average $12,000 - $15,000 per day

How to Price When Limits Have Historically Been Less Add Cat charge Ignore extra cost, because don’t believe it will happen Add extra cost, but reduce price with discretion

Major “Cat” Events of Past 10 Years Have Had Minimal Impact on ESL Experience

Luck? Losses also constrained with policy limits It’s still not in the experience!

Eventually There Will Be Impact 2011 may be small enough not to worry about

Underwriting is Too Aggressive

Today’s Market: Increased Competition on Lasers

No laser or no laser at renewal policies are becoming common Additional costs for this product are being lost due to competition

Large PPO Discounts Plus Underwriting Discretion Necessary to compete with BUCAs which have increasing share of the

market Other Discounts Available

Health Management programs have been certified for a 10% discount on specific stop loss coverage

Competition on Aggregate Attachment Points Early Lock-In of Rates Some Companies Have “You First” Attitude, Waiting for

Competition to Act More Responsibly in Rating Many Companies Trying to Figure Out How Heath Care Reform Will

Impact Stop Loss

Competition on Aggregate Attachment Points

Low Premium Will Not Absorb Claims

Supposed to be Sleep Coverage Some players are pricing to a loss ratio

Agents/Brokers are Selling on Aggregate Attachment Point as Well as Specific Premium and Lasers

This Year More Aggregate Activity is Apparent in Audit

Do We Remember the Underwriting Mistakes from the Late 1990’s?

BUCAs can Afford Lower Attachment Points as Their Claim Costs are Lower

What to Watch for on Aggregate

As Underwriting Loosens on Lasers, Consider Potential Specific Claims Compared to Historic Number of Specific Claims Which Will Affect the Accumulation

Health Care Reform May Impact, including Eliminating Cost Sharing for Preventative, Removal of Pre-Ex, Elimination of ER Pre-Cert Penalties, etc.

Evidence that in the Past Years, First Dollar Trend is Materially Lower for HDHP, as Consumers Make Cost Conscious Decisions for First Dollar Care

May reduce aggregate attachment points PWC estimates 2.5% lower trend CIGNA states their CDHP experience ½ the trend of HMO

and PPO Won’t last forever – enrollment is still low with positive

selection and short term effect – people will still get sick

Trend

First Dollar Trend has Been Relatively Consistent Over the Past Few Years

2010 Segal Health Plan Cost Trend Survey PPO Medical + Rx Projected 2010 trend – 10.5%

Aon Summer 2010 Health Care Trend Survey PPO Medical + Rx – 2010 trend – 10.7%

PriceWaterhouseCoopers Healthcare Cost Trends for 2010 All Plan Type Overall Projected 2010 trend – 9.0%

But Leveraged Trend has Changed with Reverse Leveraging Occurring in Some Instances

Trend in Underwriting

Most are Not Getting Trend (or Leveraged Trend for Specific!) at Writing or Renewal

Some who are getting trend in prices, off-set with getting too aggressive on lasers

Many are Not Using Actual Trend in Aggregate Attachment Points

One trend does not fill all!

Some Industry Manuals are Not Increasing by Leveraged Trend From Year to Year

Health Care Reform and Stop Loss

Does Not Appear that HCR Will Affect Stop Loss for: Minimum loss ratios Lasering, disclosure requirements, medical underwriting

Does Appear that HCR Will Affect Stop Loss for: Cover on family until age 26

track composition of family and average number of people covered

No lifetime maximums Some Stop Loss carriers have announced (and many have

implemented) intention to revise stop loss policies to increase plan maximums including no limit options

Potential explosion of high cost claims when limits are increased or removed

No rescissions Qualify for early retiree pool

Health Care Reform and Stop Loss

Other Things to Consider Mandated coverage for biological Rx

Employer must report value of coverage

Clinical trial exposure

Market Size – Health Care Reform

No Consensus on How Health Care Reform will Impact Total Size of the Stop Loss Market

Some Believe that HCR will Increase the Size of the Market as Employers with Higher than Average Paid Employees Attempt to Keep Control of Health Care Costs

These employees will not qualify for subsidies on the exchange

May open opportunity for new/expanded product innovation, such as limited medical to fill some gaps and specialty carve-out products to limit employer exposures

Very Large Employers will buy Stop Loss for the First Time due to Unlimited Benefits and Increased Liability for Catastrophic Claims

Market Size – Health Care Reform (cont’d)

Others Believe that HCR will Decrease the Size of the Market as Reporting and Tracking Requirements for the Employers Become More Burdensome

Lower paid employees will have incentive to move to exchanges

Fees on Self-insured plans

Presentation by Milliman saying they believe 10 – 20% of employers will move out of self-funded plans

Other Potential Changes to Market

Transparency in Costs – Administration and Brokerage Taken Out of “Insurance Costs”

Already happening

Pressure on Providers for Transparency May Reduce the Differential by Network (Consumer Driven)

No material effect yet

Poor Results for Risk-Takers May Potentially Slightly Reduce Capacity

Continued Consolidation

Chaos Breeds Opportunity

How to Get New Groups or Keep Existing Groups Be prepared to help with administrative burdens for

reporting by group

Discount, discount, discount Without low claim costs, will not be able to compete

Low expenses Directs operate at low expenses and leverage

administrative services. Take administration and commission out of premium

Specialty carve-outs may reduce employers first dollar aggregate risks

Thank You !

Alison J. Saifer, FSA, MAAAPresident

asaifer@actmgmt.com(215) 862-8390

www.actmgmt.com

Actuarial Management Strategies, Inc.AMS