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SPOTLIGHT ON MARYLAND:
Health Insurance Premiums,
the Underwriting Cycle and Carrier Surpluses
Deborah CholletSenior Fellow, Mathematica Policy Research
Maryland Health Care Commission January 27, 2005
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Overview
The net cost of insurance and the
underwriting cycle
Trends in Maryland
– Underwriting gains and administrative
costs
– Insurer surplus or unobligated funds
Implications for premiums and the market
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The Net Cost of Insurance
Net cost of insurance
= premiums minus medical benefits
Nationally, the net cost of insurance has
grown as a percent of premiums …
While aggregate premium growth slowed due
to coverage loss and benefit redesign
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Nationally, the net cost of insurance is
nearly 14 percent of premium
11.9%12.8% 13.6%
9.6%10.6%
9.3%
0%
5%
10%
15%
20%
2001 2002 2003
Net cost perpremium dollar
Premiumgrowth
Source: CMS Office of the Actuary, National Health Statistics Group (2005).
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The Underwriting Cycle
Net cost – administrative cost = underwriting gain
Historically, underwriting gains have moved in cycles lasting about 6 years
Since 1990, underwriting cycles have been longer and more shallow, probably reflecting
– Competition with managed care and effort to deter entry
– Growing market concentration
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Trends in Maryland
Administrative costs have declined as a percent of premium
But underwriting gains have risen faster
On net, employers and consumers have seen the net cost of insurance rise as a percent of premiums
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Underwriting Gain & Administrative Cost as a
Percent of Premiums: Group Coverage in Maryland
7%6% 6%
4%
12%
15%16%
19%
21%22%
0%
10%
20%
30%
1999 2000 2001 2002 2003
Average
underw riting gain
Administrative cost
trend
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Insurer Surplus
Underwriting gains not spent in the current
year accumulate as insurer surplus
Measured using NAIC accounting
conventions, surplus accounts for most or all
of an insurer’s ―total authorized risk-based
capital‖ or TAC
Insurers must hold TAC of at least 200% of
―authorized control-level‖ risk-based capital,
or ACL (BCBS = 375%)
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Total Authorized Risk-Based Capital in
Maryland Relative to Regulatory Levels
$0.8 $0.7
$1.1
$1.3
$1.7457%
378%
467%
508%
654%
$0.0
$0.6
$1.2
$1.8
$2.4
$3.0
1999 2000 2001 2002 2003
0%
200%
400%
600%
800%
Total
authorized
capital (TAC)
in $billions
TAC per
authorized
control level
risk-based
capital
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Implications for Premiums
Downturn of the underwriting cycle and lower administrative costs may finally offer Maryland employers premium relief
With shallower and longer cycles, insurers could hold lower surplus throughout the cycle
But insurers cite other reasons for maintaining high surplus—e.g., a potential terrorist attack
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Implications for the Market
In general, regulators have a bias toward greater surplus
But in a concentrated market, it may have unintended consequences:
– Deter new market entry
– Raise consumer prices, but not improve market stability
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