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Reinsurance in Health Business

Reinsurance in Health Business. 27 th April 2014. Outline. Introduction: Main Providers of Health Coverage Health Claims Management Need for Reinsurance What is the reinsurance market Purpose of reinsurance in general Why health reinsurance?

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Reinsurance in Health Business

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  1. Reinsurance in Health Business 27th April 2014

  2. Outline • Introduction: • Main Providers of Health Coverage • Health Claims Management • Need for Reinsurance • What is the reinsurance market • Purpose of reinsurance in general • Why health reinsurance? • What are the challenges facing the health insurance sector • Forms and types of reinsurance applied • Role of reinsurer and reinsurance broker • Q&A

  3. Main Providers of Health Coverage • Governments (public hospitals, labs, etc.) • Social insurance funds • Cooperative healthcare providers • Private Insurance companies • Self-funded schemes

  4. Claims Management Either: • Professional independent bodies, known as Third Party Administrators (TPAs) Or: • In-house claims processing departments adopted by certain insurance companies

  5. Reinsurance market Direct Client Direct Broker Insurance Company Reinsurance Broker Reinsurance Company Retrocessionaire

  6. Purpose of reinsurance • Risk Transfer • Capacity • Spread of risk • Business reasons: • Stabilization • Portfolio Management

  7. Why is Reinsurance needed for Medical • Protects shareholders and Capital • Protects Solvency requirements and provides Security • Stabilizes results by leveling claims fluctuations • Spreads risks throughout world markets • Access to wider experience (territory/products) • Provides higher capacity when needed • Transfer losses?! • Helps facing the current challenges

  8. Challenges faced in the Medical sector • Low awareness of insurance products and their benefits • Religious believes in certain countries • Lack of tailored-products • Lack of proper regulation in certain countries • Mandatory health insurance without proper Infrastructure • Anti-selection • Distorted Information • Competition

  9. Forms of Reinsurance TREATY FACULTATIVE NON PROPORTIONAL • Risk & Cat XL • Stop Loss PROPORTIONAL • Quota Share • Surplus NON PROPORTIONAL • Risk XL (Specific Stop Loss) • Catastrophe XL • Aggregate XL/Stop Loss PROPORTIONAL • Quota Share

  10. Forms of Reinsurance Facultative Reinsurance for individual risks Treaty Reinsurance for entire portfolios

  11. Types of Reinsurance Proportional Quota Share Surplus Non Proportional Excess of Loss Stop Loss

  12. Quota Share – Definition Quota Share Reinsurance is a form of pro rata reinsurance (proportional) in which the reinsurer assumes an agreed percentage of each insurance being reinsured (cession) and shares all premiums and losses accordingly with the reinsured

  13. Quota Share – Definition

  14. Quota Share – Information needed • Original Policy Wording (to be approved) • List of products with schedule of benefits • Applied tariffs • Statistics for the past 3 to 5 years (different forms) • Claims database • Premium figures, historical, actual and estimated • Claims management procedures: if TPA, which one? • Copy of SLA • Details on in-house claims processing department, if applicable

  15. Quota Share – Features (1/2) • Cession / Retention based on cedant’s level of desired retention and reinsurance capacity available • Gross v.s. Net • Table of tariffs incorporated in agreement • Renewal formula required • Referral cases: high loss ratio, groups exceeding “x” number of members, deviations, etc • Enforcement of a particular TPA

  16. Quota Share – Features (2/2) • Premium Cap • Loss Cap • Profit Commission • Quarterly accounts • Monthly or quarterly performance reports with details on premiums and claims • Right of tariff adjustment during the year • Inspection of records

  17. Quota Share - Advantages • Shares the same fate of the insurer, thus reduces the impact of higher frequency of claims (limited however by a loss cap) • It helps in protecting the solvency margin in case the cedant reaches a critical solvency ratio according to local regulation • Reduces net expense levels especially if commission is generous

  18. Quota Share - Disadvantages • Imposing a loss cap • Strict underwriting and rigid rules imposed by the reinsurer: • Imposing products with table of benefits and tariffs • Enforcing TPAs to deal with • Excluding groups of certain size and type • Preference to small and medium size business (placing large groups on facultative basis is extremely difficult) • Limited flexibility if underwriting info is unavailable. • No protection against severity, which is one of the main concerns in medical insurance

  19. Excess of Loss - Definition Excess of Lossis a type of reinsurance which indemnifies the insurer (reinsured) or insured against all or a specified portion of losses on an underlying insurance policy or portfolio in excess of a specified amount. This amount is the retention of the insurer and is referred to as Priorityor Deductible. Excess of Loss Trigger for Medical Reinsurance can be on: • Per Person Per Year basis • Per Claim basis

  20. Excess of Loss – Information needed • Detailed list of individual claims per year, exceeding 50% of the desired priority, for the past x years • Basis of cover, loss occurring or risk attaching • Retained Premium figures, historical, actual and estimated • Risk profiles (age band, class, gender, etc) * Information requested for Quota Share

  21. Excess of Loss - Features • Maximum limit of liability in excess of priority • Aggregate limit of liability • Cost of the cover: • Rate as a % of the premium: • fixed rate • Sliding between minimum and maximum, adjusted based on the actual claims recovered from the XL, subject to loading factor • Minimum and Deposit Premium payable in advance, adjustable at the end of the contract • Performance Reports • Referral Rules

  22. Advantages of Excess of Loss • Flexible reinsurance support for all types of groups • Advising on the adequacy of original pricing without imposing it • Quicker feedback from reinsurers on special requests, enabling insurer to meet deadlines • No or little interference in the design/pricing of the original products • Flexibility of dealing with multi-TPAs, if needed • Protection against severity and hyperinflation in medical costs • Easier accounting procedure

  23. Disadvantages of Excess of Loss • Does not provide proper protection against frequency of small claims, with little or no protection for OUT claims, specially if the trigger is on a per claim basis. • However, an XL treaty could protect frequency in case the trigger is on a per person per year basis. What about cost?

  24. Excess of loss Example Assuming limit of liability of original policy is JOD 12,000. An excess of loss is arranged as follows: • JOD 8,000 (limit) in excess of JOD 2,000 (priority) per claim • Insurer will bear maximum JOD 2,000 of each and every claim (small claims, high frequency), plus any amount exceeding JOD 10,000 • The reinsurer will bear 100% of all claims in excess of JOD 2,000 up to the maximum limit of JOD 8,000 (severe claims, low frequency)

  25. Excess of loss Example

  26. Stop Loss • This will be done by means of insurance/reinsurance, whereby total loss amount exceeding the initial budget set for the year may be absorbed by the insurance/reinsurance and recouped the following year(s). In other words, stop loss protects against fluctuations in annual loss experience. • Deductible/priority of insurer could be, either: • Percentage of annual premium • Fixed sum (more known as aggregate stop loss)

  27. Stop Loss Example (1/2) • Assuming the combined total claims of the portfolio at the end of the calendar year exceeds the initial set budget by more than 10% (loss ratio exceeding 110%), the reinsurer will bear all losses above this amount. • It may be capped again up to a certain limit, for example, 130% loss ratio, beyond which any losses will fall back on the insurer

  28. Stop Loss Example (2/2) Limit of cover: 20% in excess of 110% loss ratio • Total Premium at end of year = JOD 1,000,000 • Total Losses end of year = JOD 1,250,000, i.e. Loss ratio 125% • Deductible: 110% = JOD 1,100,000 • Stop Loss will reimburse JOD 150,000 to the insurer, i.e. all losses exceeding 110%, but up to maximum 130% *Under a financial stop loss, part or all of the deficit of JOD 150,000 will be transferred to the next financial year of the insurer and added to the calculation of the stop loss cover of the next financial year

  29. Additional Role for the Reinsurer/RI Broker • Put health insurance expertise at the service of the insurer through optimized solutions based on extensive market experience and best practices • Review original plans/benefits for different categories • Assist in budget setting • Introduce TPAs (if applicable) and assist in reviewing service level agreements, providing general guidance • Provide technical support via the analysis of claims reports: identification of specific claims trends, sources of abuse and overall performance • Suggest different cost-containment measures to be introduced at the level of schemes through appropriate processes

  30. Questions?

  31. Thank You !

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