Establishing an Analytical Framework for Measuring the Role of Reinsurance in the Health Insurance Market. 1. The Indemnity Market


Insurers purchase reinsurance for other insurers for a number of reasons, so this market is more difficult to characterize than the employer or HMO stoploss markets. Informants suggested that health insurers that purchased reinsurance tended to be smaller, regional carriers. The business reinsured tends to be individual or small group health insurance. Typical arrangements include specific stoploss (one informant estimated that 75 to 80 percent of this business was specific stoploss), aggregate stoploss for a book of business (e.g., association small group business), and quota share arrangements. In a quota share arrangement, the primary insurer retains a set percentage of the losses and the premium and transfers the remainder to the reinsurer. The primary insurer uses reinsurance to find a level of risk exposure that is commensurate with its size, business strategy and available resources. In some cases, reinsurers provide expertise or services to the primary insurer, including case management on severe claims. One informant indicated that they ceded a portion of the reinsurance risk they assumed to other reinsurers (called a retrocession). He suggested that a portion of reinsured risk is ultimately ceded to a few large reinsurers.

The market is currently very active. A survey by CIGNA estimated 13 or 14 major reinsurers in the market, and one reinsurer estimated roughly 300 to 400 insurers ceding risk. Competition in the market is high, and one reinsurer noted that no reinsurers have achieved much profit. Premiums, however, have increased recently, up to five or six percent this year from two or three percent last year.