Specifying variables for the indemnity insurance market is the most difficult of the three markets we are considering for several reasons. First, how and why reinsurance is used by indemnity insurers is not well understood in the policy community, and the policy questions about its potential roles have not been fully formulated. Second, the potential roles for reinsurance in the indemnity insurance market are numerous, which makes identifying information that relates to the issues that policymakers may wish to understand more difficult. Reinsurance may potentially play a role in such things as market entrance strategies (e.g., limiting risk while developing experience in a new market), market exit strategies (e.g., leaving a market by transferring the risk of existing business to another carrier through assumption reinsurance9), financial management (e.g., purchase of specific or aggregate stoploss), marketing strategies, or for other strategic or financial reasons unique to the insurer.
The policy questions posed by ASPE relate to potential issues of market concentration; more specifically, whether there may be a pattern of a larger number of primary insurers writing coverage but using reinsurance to transfer a substantial portion of the risk of loss to a more limited number of insurers.10 We believe that the following variables would be the most important to understanding if these types of arrangements are prevalent in the market:
- Cessations by primary health insurers. The most basic information that is needed is the presence of a reinsurance arrangement. As discussed below, current information about health reinsurance does not necessarily distinguish reinsurance transactions by type of health insurance. Since the identified policy issues relate to basic health insurance (e.g., hospital and surgical coverage; major medical coverage) and not to supplemental or other types of health risks, information about reinsurance arrangements (including the information described in the variables below) should be limited to transactions related to primary health insurance.
- Structure of Transaction. Another factor that is important to understanding the role of reinsurance in this market is the structure of the transaction. Identifying if the reinsurance is structured as proportional (e.g., reinsurer receives a set proportion of the premiums, expenses and losses for each reinsured risk)11 or excess of loss may be useful for the purposes of the stated policy issues. For example, an employer interested in truly catastrophic coverage is likely to purchase excess of loss coverage. However, an employer interested in passing most of the risk on to a reinsurer could use either an excess of loss arrangement with a very low threshold, or a proportional arrangement with the reinsurer receiving a large share of the premium and loss exposure for each covered group or individual. Given only information about structure, it may be reasonable to assume that proportional contracts transfer most of the risk, whereas excess of loss contracts may either transfer most of the risk or insure against catastrophic loss.
- Risk of Loss Transferred. In addition to the structure of the reinsurance transaction, it is important to know the magnitude of the risk that is being transferred. This can be a difficult issue for health insurance, because the insurance risk associated with a covered individual is concentrated at higher dollar levels and is not proportional to the percentage of premium.12 Useful indicators would be the proportion of losses transferred in proportional arrangements and the specified thresholds for excess of loss arrangements (dollar thresholds for arrangements related to single lives and percentage thresholds for aggregate arrangements). In addition, it would be useful to know if the primary insurer retained any share of the losses (e.g., coinsurance) above any excess of loss thresholds.
- Unit of Reinsurance. Another important factor is the subject unit of the reinsurance transaction -- is the reinsurance relevant to the risk associated with a particular individual or some larger aggregation of lives. Relevant distinctions might include transactions related to: individual lives (and families); single employer groups; multiple employer groups; discrete blocks of business (e.g., all health insurance sold to groups with fewer than 50 lives or all health insurance sold through the contract with the local business coalition); and all health insurance of the primary insurer.
- Identification of Risk Assumers. To determine if there is significant market concentration occurring through reinsurance, it is important to know the identity of the insurers assuming the risk being transferred through reinsurance.
9 Assumption reinsurance is discussed in the next section.
10 We should note, as ASPE staff did in their scope of work, that there is nothing illegal or necessarily wrong with this type of arrangement. Policymakers, however, may want to know where risk is concentrated in the market as they assess policy options for potential market reforms.
11 See "Glossary of Terms," Reinsurance Association of America (1994).
12 See Robinson, J. "Stoploss Analysis." Memorandum. Coopers and Lybrand L.L.P. October 18, 1994.