Changing environment is the primary driver of growth in health reinsurance – AM Best | Insurance Business America Reinsurance Changing environment is the primary driver of growth in health reinsurance – AM Best
Director says there has been a significant increase in the volume of transferred insurance premiums
Reinsurance
Kenneth Araullo
Doniella Pulis, director at AM Best, discussed insights from a recent report showing the growing role of health care reinsurance due to rising health care utilization and health care inflation.
Health insurance is recognised as one of the fastest growing sectors, accounting for around 50% of global premium income, but it does not occupy a prominent position in the reinsurance market.
In an interview, Pulis explains that several features of health insurance reduce the need for reinsurance: Health insurance contracts are typically short-term, can be repriced annually, and have minimal exposure to catastrophic events, reducing the need for reinsurance.
Nevertheless, health insurance products often operate with relatively high overall ratios and significant capital requirements, increasing the demand for reinsurance. As major insurers grow, they are increasingly turning to reinsurance to increase capital flexibility.
According to Pulis, the primary function of health reinsurance is not to prevent losses but to support growth and ease capital pressures. As a result, health reinsurance volumes are expanding both in the U.S. and globally.
Growth in the US segment
The US health reinsurance market is experiencing a significant increase in reinsurance premium volumes between health and life insurers, which is expected to grow from $49 billion in 2014 to $110 billion in 2023, accounting for approximately 7% of total premium income.
This growth is driven by declining profitability of core products, increasing high-cost medical claims, and the need for core insurers to optimize their capital structures.
In 2023, US insurers faced new challenges, especially in the Medicare Advantage segment, which currently commands the highest premium income in the market, as the profitability of this segment has declined significantly due to high utilization of various services.
This trend is expected to continue through 2024, with anticipated regulatory changes and increased scrutiny from the public and legislators putting pressure on future profitability.
Medicaid profits also declined as expected as states redetermined eligibility following the end of the COVID-19 public health emergency, although this decline was partially offset by improved performance in the commercial division.
Overall, revenues in the U.S. healthcare sector remained flat, but margins contracted significantly. Reinsurance was used to mitigate the capital impact of these revenue declines and allow for continued premium growth. Given the current interest rate environment and high costs of debt, reinsurance has become a more attractive option to support capital needs.
Impact of the pandemic on segments
The COVID-19 pandemic has had a significant impact on the health insurance sector over the past few years. During the first two years of the pandemic, health insurers in the US and globally experienced increased revenues due to lower claims utilization. Lockdowns and general precautions led to fewer doctor visits and postponed elective medical care, but people continued to pay their premiums.
However, by late 2022, health insurance reverted to traditional medical patterns along with pent-up demand due to COVID-related disruptions. Additionally, the severity of claims due to delayed and misdiagnosed diagnoses increased, especially in cases of cancer and heart disease.
From a reinsurer perspective, the first two years of the pandemic were beneficial for the healthcare sector, helping to offset losses in the mortality sector due to COVID-19. However, recent health insurance trends and uncertainty regarding future utilization and claims have led some global reinsurers to reconsider their growth plans in this sector.
As for which health insurance segments are transferring the most premiums to reinsurers, Pulis noted that in the U.S., the top three segments are commercial, Medicaid and Medicare Advantage.
Over the past decade, robust growth and limited revenues have driven the majority of ceded premiums from government programs, but over the past three years, the commercial sector has contributed significantly to growth, with commercial ceded premiums expected to reach $20 billion in 2023 compared to $12 billion in 2021.
The increase was driven in part by losses in the commercial sector, particularly in retail exchange products, in 2021 and 2022. Reinsurance arrangements helped mitigate pressures and support capital during this period.
In the case of Medicaid, the second-largest insurer by transferred premiums, the majority of premiums are transferred to affiliates, with large insurers leveraging corporate structures to allocate premiums and optimize capital.
Among lines of business where premiums are transferred to unaffiliated companies, the Commercial, Medicare Advantage, and Medical Stop-Loss segments stand out. Medical Stop-Loss, while relatively small in size compared to Commercial and Medicare Advantage, is more heavily reliant on reinsurance as it is disproportionately affected by large claims.
The increase in stop-loss reinsurance claims and costs has led to a significant increase in reinsurance rates in this sector.
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