The issues associated with reinsurance13 by self-funded employers actually are quite similar to those for HMO reinsurance -- understanding how self-funded employers use reinsurance to minimize risk volatility and how that use varies by size of plan. Of particular interest in this market is the use of "excess of loss" coverage (typically called stoploss coverage in this context) by small employers. This interest is spurred in part by suggestions that small employers are being offered stoploss coverage with low threshold levels as a method of evading state insurance laws. With low threshold levels, a substantial portion of the insurance risk appears to be transferred to the stoploss insurer (making the insurance resemble traditional indemnity insurance), but the employer is able to claim that its plan is self-funded. Self-funding enables the employer to avoid state premium taxes and state-mandated benefits requirements, because ERISA exempts self-insured plans from such requirements.
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 self-funded employers. The most basic information that is needed is the presence of a reinsurance arrangement. Information about the size of the employer (e.g., number of employees or number of covered lives) also should be available so that arrangements can be analyzed by size of employer.
- Structure of Transaction. An important factor is the structure of the coverage. Our interviews with brokers and reinsurers indicate that most employer reinsurance appears to be stoploss coverage, so the most important distinctions are between specific and aggregate stoploss arrangements. If possible, it also would be useful to understand the extent to which employers purchase "minimum premium plans." Minimum premium plans are arrangements in which employers retain the risk for a substantial portion, but not all, of the expected losses for a defined period. The risk above the retention point is insured by an insurer, which typically also provides the administrative functions to the employer. In some arrangements, the risk transfers back to the employer after a certain level of losses; in other arrangements all of the risk over the retention point is transferred to the insurer.
- Risk of Loss Transferred. In addition to distinguishing between specific and aggregate arrangements, it is important to know the magnitude of the risk that is being transferred. The relevant information is the stoploss threshold levels (dollar thresholds for arrangements for specific arrangements and percentage thresholds for aggregate arrangements). In addition, it would be useful to know if the employer retained any share of the losses (e.g., coinsurance) above any stoploss thresholds. Similar information would be useful in the case of minimum premium plans.
13 As discussed above, the term reinsurance is not technically correct as it relates to self-funded employers.