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Reinsurance for the NJ Market

Reinsurance for the NJ Market. R. Neil Vance NJ DOBI July 19, 2007. NJ Commercial Health Market 2005. 2.5 million people $8.95 bb premium $7.31 bb claims 81.7% medical loss ratio Three largest carriers – ~80% of market Est. Underwriting gain 4.0% of premium. NJ Reform Mkts (SEH, IHC).

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Reinsurance for the NJ Market

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  1. Reinsurance for the NJ Market R. Neil Vance NJ DOBI July 19, 2007

  2. NJ Commercial Health Market2005 • 2.5 million people • $8.95 bb premium • $7.31 bb claims • 81.7% medical loss ratio • Three largest carriers – ~80% of market • Est. Underwriting gain 4.0% of premium

  3. NJ Reform Mkts (SEH, IHC) • Voluntary; Commercial Carriers • Guaranteed Issue (if eligible) • No health rating (pre-ex permitted) • Modified or pure community rating • 75% loss ratio requirement w. refunds • Standardized benefits (riders in SEH) • No reinsurance (except IHC assessment)

  4. Small Employer (SEH) • Enrollment of 900,000 (over 10% of pop.) • Average loss ratio of ~80% • Average underwriting gain of 3% • Six major carriers • Average contract size of 4 employees • Employer participation above nat. average • Rate by age/gender/territory w. 2:1 limit

  5. Individual (IHC) • Enrollment 80,000 (inc. 20,000 in B&E) • Standard Plans are pure community rated • B&E Plans have lower benefits and riders • B&E Plans rated age/gender/terr 3.5:1 • Ave. Loss Ratio 85% in 2005 • High Average Premiums

  6. AHIP Study (2005) • 2004 Ind Rates NJ: $500/mo CA: $155/mo • Current: $470/mo for $30 HMO • Current: $150-$200/mo for age rated B&E • These rates are available to anyone, not just the healthy • NJ SEH market is also guaranteed issue

  7. Why Reins in NJ Market? • Carriers must accept high cost people • This increases average premiums • Increased average premiums lead to adverse selection • This can start a selection spiral • Externally funded reinsurance can avert a selection spiral

  8. Example of a Reins Program • Automatic, everyone covered is reinsured • All benefit plans are covered • Specific stop-loss with high attachment point (eg $100,000) and coinsurance (90%) • No reinsurance maximum • Low subsidy per person; low impact on affordability

  9. Combined Mkt/Reins (1) • Combine IHC into SEH market • Reduces individual rates 30% ave; increases group rates 1% ave (Mercer) • Increases enrollment by 100,000 to total of 1.1 million (Mercer) • Impact from lower average rate and age rating for individuals

  10. Combined Mkt/Reins (2) • Specific Stop Loss Reins (e.g.$100K/90%) • Cost in the $150mm - $200 mm range (Mercer) • Reduce small group rates 3% - 4% (Mercer) • Increase enrollment by an additional 5,000 • Additional effects: reduced cost of capital, rate stability, new market entrants • Other reinsurance designs are possible

  11. Reins. in Context of Reform • Excess of Loss Reinsurance “socializes” large claims • Everyone is able to buy coverage at “standard” rates • Does not address the problem of affordability of “standard” rate • More comprehensive and expensive programs are probably necessary

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