The purpose of this study was to undertake a limited examination of the role of reinsurance in the three target markets. The study was essentially exploratory. In conducting the study, we attempted to determine what data was available about reinsurance in these markets, whether it was useful in measuring the level of risk borne by reinsurance, whether it was available for analysis, and, if the necessary data was not available, how it could be collected.
Our approach to the study included the following steps:
- Conducting a literature review to find information on the targeted reinsurance markets and potential sources of information on the amount of reinsurance in those markets.
- Polling researchers and people associated with the reinsurance and excess (i.e., stoploss) industries for assistance in identifying sources of information on the amount of reinsurance in the target markets.
- Acquiring and analyzing data from the sources we identified.
- Identifying key variables for assessing the level of risk borne by reinsurance in the three markets.5
- Interviewing participants in each of the three target markets to develop profiles of the role of reinsurance in those markets.
- Interviewing individuals associated with public and private surveys to determine whether additional information about reinsurance would be collected in future surveys.
- Developing potential strategies for collecting information about the level of reinsurance in each of the three markets.
We have conducted several literature reviews seeking information about the role of reinsurance in the health insurance market, both for this study and for a previous ASPE project. Our reviews included both academic and research journals and the insurance and employee benefits trade press. We also obtained information from private firms (such as Foster Higgins) that conduct their own surveys related to health insurance and health benefits.
In addition to the literature review, we polled individuals from associations and other groups that we believed would be likely to know about any existing research on the reinsurance industry. Most of these are well known, and others were identified by other organizations we contacted. We contacted the following organizations:
- A.M. Best
- American Academy of Actuaries
- American Association of Health Plans
- Association of Private Pensions and Welfare Plans
- Health Insurance Association of America
- National Association of Insurance Commissioners
- Reinsurance Association of America
- Society of Actuaries
- Self Insurance Institute of America
Several public and private sources of data on health insurance and health benefits were also contacted. When the project began, we anticipated that state insurance filings by insurers and HMOs would be a potential source of information for assessing the risk borne by reinsurance in at least the indemnity health insurance and HMO reinsurance markets. Our initial plan had been to visit three states to obtain information from a sample of the annual financial statements filed by insurers (including insurers offering reinsurance) and HMOs in the state. However, after discussions with representatives of the NAIC, we determined that we would be able to obtain from the NAIC electronic versions of the Annual Statement filings for indemnity (non-HMO) insurers in the entire U.S., obviating the need to collect the information from individual states. We obtained data from the reinsurance section (Schedule S) of the Life, Accident, and Health Annual Statements of all insurers who filed. Schedule S contains detailed information about reinsurance ceded and assumed by the filing insurer.6 The information in Schedule S for ceded insurance includes such things as the name and location of each carrier to whom an insurer has ceded risk, the paid and unpaid losses related to each contract, the premiums paid for each contract, and the type of the reinsurance contract (delineated along several variables, including whether the contract is group or individual, whether there is a coinsurance requirement and the type of coinsurance, and whether it is a yearly renewable term contract). Information for assumed insurance includes the name and location of each insurer that has ceded risk to the assuming insurer, the amount of reinsurance in force, the premium involved, and the type of reinsurance contract. Transactions between affiliated insurers are shown separately in the exhibits.7 The Schedule S instructions and a sample of each of the exhibits is attached as Attachment A.
Unlike data for indemnity insurers, HMO Annual Statement filings are not currently available through the NAIC.8 We identified two states that would locate and copy the relevant reinsurance information from the HMO annual statements: Wisconsin and Pennsylvania. HMOs also file quarterly financial statements, but the annual statement information is more complete. We collected information about all of the HMOs operating in those two states.
In addition to state regulators, we contacted several additional public and private sources, including the Bureau of Labor Statistics of the Department of Labor (regarding their Employee Benefits Survey); the Agency for Health Care Planning and Research (about the Medical Expenditure Panel Survey); the National Center for Health Statistics (about the National Employer Health Insurance Survey); the Rand Corporation (about surveys they have conducted and are conducting for the Robert Wood Johnson Foundation); KPMG and Gail Jensen (funded in part by the Kaiser Family Foundation); A. Foster Higgins (about their annual survey of employers); Hay Huggins (about periodic surveys of employers); and Tillinghast (about periodic surveys of employers and about reports that they had conducted a survey of reinsurers).
As the results that follow suggest, only a limited amount of the information we sought was available from the sources we contacted, which meant that we were unable to prepare an analysis about the amount of risk borne by reinsurance in the three target markets. For two of the markets, the indemnity insurance and self-funded employer markets, there is really no reliable data currently available that would provide an understanding of the terms of the reinsurance arrangements used by market participants. For the HMO reinsurance market, useful information is available in the annual financial statements filed by HMOs in the states in which they operate, but currently there is no central source for the information. Beginning in 1997, information from some 1996 state filings will be available from the NAIC. However, because states are currently not required to file with the NAIC, this information will most likely be incomplete. In place of an analysis of the amount of risk borne by reinsurance, we have attached samples of the information that we were able to collect and have included a discussion of its usefulness and limitations in the results section below.
The limited amount of available data also hampered our ability to identify key variables for either present or future analysis. Without good existing information, or a good sense of the type of information that might become available to researchers in the future (particularly for the indemnity insurance and employer stoploss markets), it is difficult to shape appropriate and useful analyses of the three target markets. However, we did identify some variables that we believe would be key to future data collection efforts if such efforts were attempted.
Due to the lack of information, we also were unable to develop profiles of the role of reinsurance in the three markets. Rather, in order to gain a conceptual understanding of the three reinsurance markets, we conducted interviews with reinsurers, brokers, and third party administrators. We identified reinsurers in the indemnity market by using the NAIC Annual Statement data to identify the reinsurers with the highest premiums. For the HMO market we selected the reinsurers with the highest frequency among the Annual Statement filings in Wisconsin and Pennsylvania. We gathered data on employer stoploss by interviewing the carriers identified in the other two markets, or others whom these respondents recommended. We used the information from these interviews to construct profiles of the three reinsurance markets.
In the next section, we discuss the important variables that would assist researchers, policymakers and others to understand the role played and the level of risk borne by reinsurance in each of the markets. The results of our data identification and collection efforts are discussed in the following section, separated by target market. We then present the profiles of the role of reinsurance in the three markets developed from interviews with market participants, and conclude with a discussion of potential strategies for collecting information about the level of reinsurance in each of the three markets.
5 We limited our study to a description of the structure and parameters of reinsurance arrangements (e.g., the level of coverage, whether the coverage is specific or aggregate). Because data is lacking, we do not explore how the variability of claims costs interacts with these structures and parameters.
6 Ceding is transferring risk to another insurer; assuming is accepting risk from another insurer. Ceding insurers are the buyers of reinsurance and assuming insurers are the sellers of reinsurance. Sometimes, an assuming insurer will transfer a portion of the assumed risk to another insurer. This is referred to as a retrocession.
7 Affiliated insurers are insurers that share a certain percentage of common ownership or control and include subsidiary arrangements.
8 They will be available electronically from the NAIC beginning in 1997 for calendar year 1996.