Pandemics, Catastrophic Trends and Capital Issues · Pandemics, Catastrophic Trends and Capital...
Transcript of Pandemics, Catastrophic Trends and Capital Issues · Pandemics, Catastrophic Trends and Capital...
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Pandemics, Catastrophic Trends and Capital Issues
John P. Cookson, F.S.A. Milliman, Inc.
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Tail Risk
Pandemic is the prime example Other risks could combine to reach this level Pandemic combines with other risks and can occur at same time
as other unfavorable risks
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Measurement of Healthcare Risk
Typically related to increases in Loss Ratio (LR) above target Always expect some random fluctuation LR a function of premiums and claims Both driven by claim cost trend
– Claim trends determine future claims when applied to past claims– Past claim trends, inaccurate forecasts of past claim trends and
forecast of future claim trends determine premium
So claim trend is a primary driver of LR fluctuations Claim cost trend is primary driver of healthcare underwriting risk
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Types of Risk in Healthcare Insurance
Management Risk– Bad decisions
Other (non-controllable)– Political--Obamacare, mandated benefits, rate regulation, exchange
risk corridors, rebates, risk adjustment
Random Risks– Catastrophic claims, epidemic, catastrophes
Economic Risks– Unanticipated changes in the economy affecting trends– Economic growth, inflation
All can affect perceived trends
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Risk Affects Capital Needs
Capital needed reflects the risks taken Size and geographic spread affects risk Access to capital affects risk Reinsurance or other risk transfers can control risk Does reinsurance or risk control necessarily reduce the capital
you need since if it reduces risk?– Counterparty Risk– Regulator RBC Credit?– Rating Agency RBC Credit?
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Impact of Trends on Rating Lag
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Adjusted HCI and S&P Claims Indices vs. CPI-W (1-Year Trend, 12-Month Lag) +
Personal Income (3-Year Trend, 18-Month Lag)
Trend Composite CPI-W 1-Year Trend 1-Year Lag + PI 3-Year Trend 18-Month Lag
Historical Trend Fluctuations
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Impact of Trends on Underwriting Cycle
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1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Blue Cross/Blue Shield Underwriting Gain/Lossvs. Change In Healthcare Trends
Blue Cross / Blue Shield Underwriting Change in Health Cost Index
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Modelling for Pandemic Risk
Pandemic Risk Development– Potential Impact of Pandemic Influenza On the U.S. Health
Insurance Industry report, Jim Toole with input from panel of actuaries
– Estimates cost impact of 1957 and 1918 level pandemics– Potential cost impact
Two point estimate not enough Need chance of occurrence
– Rely on Life cat bond work
Trend history has epidemics since early 1970s and 1960 for NHE
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Develop Loss Ratio Model
First build model of other risks Driven by claim trend fluctuations plus other factors Then add in pandemic risks on top of other risks as simulation Flow trends thru rating system model
– Historic trends flow thru to rates along with forecasts– Future trends simulate claims
Rating model should be for homogenous classes rated on same basis– Prospective, contingent premium, refunds, etc.– Don’t mix Medicare Advantage with Commercial– Homogeneous risk characteristics
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Develop Loss Ratio Model--Premiums
Bring in other premium variables– Lag between experience and renewal data– How rates are developed– Impact of past trend estimates– Predictability of trends and methods– Target LR– Healthcare Reform impacts– Expenses and margins, lapses and sales– Pandemic rating effects
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Develop Loss Ratio Model--Claims
Model of historic trend fluctuations Impact on different carriers Size of block effects Starting cost estimate fluctuations Healthcare reform effects Correlations of trends Pandemic model impacts
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Develop Loss Ratio--Composite
Divide simulated claims by simulated premiums Distribution of Loss Ratios Develop probabilities of attachment at various LRs Develop expected costs at various LRs
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In Event of Severe Pandemic with no Protection
What happens to RBC How do you recover? Impact of ACA Loss Ratio rebate requirements
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Cat Bond Development
Use Loss Ratio Model as base for bonds Bond proceeds at risk of loss if attachment LR exceeded
– Proceeds held in trust
Risk premium over short-term investment rates– Represents payment for risk– Bond Rating Valuations
Provides capital relief for proceeds held in trust Long-term must continue reissuing or
– Raise other capital to replace
Rating agencies limit on how much credit provided in their ratings
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Alternative Methods
Use forecast of trend methods with simulations– Good forecasts can reduce variability and costs
Use swaps or reinsurance on trends– Can limit to pandemic with two triggers
• High trends plus flu pandemic
S&P Healthcare Claims Indices – Futures and Options?– Swaps– Traditional Reinsurance– Issue of capital credit for risk
Some need tighter protection than just pandemic (ACOs)– Better modelling, trend prediction, etc. can tighten the ranges
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Control of Trend Risk
Until recently no clear database S&P Claims Based Indices introduced in October 2013
– History back to early 2008
Insurers and ACOs beginning to explore links to S&P– How do you increase future payment levels?– How do you measure performance?– How do you share risk?
ASO groups looking for trend protection in future costs as a way to measure and guarantee performance
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S&P Trend Detail
National, Regional, most States, some Metro areas Several medical service breakdowns
– IP, OP, Practitioner, Rx
Individual, Small Group, Large Group, ASO
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S&P Total Cost Trends
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Total Cost - 12 Month Trends
National ASO Total Cost National Individual Total Cost
National Large Group Total Cost National Small Group Total Cost
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Impact of Individual on Total Healthcare Costs
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Total - 3 Month Trends
Total Total Excluding Individual Differential
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S&P All Business Trends
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All Business - 12 Month Trends
National All Business Facility Cost National All Business Professional Services Cost
National All Business Rx Cost National All Business Total Cost
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S&P Healthcare Claims Indices
Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC, a part of McGraw Hill Financial. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).
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Disclaimer
This presentation is a general outline of certain issues related to Health Insurance Risk. This is not to be relied upon for any applications by any user, since the particular circumstances may differ from the general discussion here. Actuarial estimates are based upon sets of assumptions and to the extent the future results differ from these assumptions, the estimates will differ from actual results. Furthermore, there is significant variability in health insurance which makes results subject to considerable uncertainty.
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