AM Best director Doniella Pliss has discussed insights from a recent report, which indicates that rising health care utilization and medical inflation are increasing the role of health reinsurance.
Health insurance is identified as one of the fastest-growing segments, generating approximately 50% of global insurance premiums. However, it holds a less prominent position in the reinsurance market.
In an interview, Pliss explains that several characteristics of health insurance reduce the need for reinsurance. Health insurance policies are typically short-term, allowing for annual repricing and presenting minimal exposure to catastrophic events, thereby diminishing the necessity for reinsurance.
Despite this, health insurance products often operate with relatively high combined ratios and significant capital requirements, which drives the demand for reinsurance. As primary carriers experience growth, they increasingly use reinsurance to enhance capital flexibility.
The primary function of health reinsurance, according to Pliss, is not to safeguard against losses but to support growth and ease capital pressure. As a result, the volume of health reinsurance has been expanding both in the US and globally.
In the US segment of the health reinsurance market, there has been a notable increase in ceded premium volume between health and life insurers. The volume reached $110 billion in 2023, representing approximately 7% of the total premium written, up from $49 billion in 2014.
This growth has been driven by lower profitability in primary products, the rise in high-cost health claims, and primary carriers’ need to optimize capital structures.
In 2023, US insurers faced new challenges, particularly in the Medicare Advantage segment, which now holds the highest premium volume in the market. Profitability in this segment has declined significantly due to high utilization across various services.
This trend continued into 2024, with future profitability under pressure due to pending regulatory changes and increased scrutiny from the public and legislators.
Earnings in the Medicaid segment also declined, as anticipated, following eligibility redeterminations by states after the end of the COVID-19 public health emergency. However, this decline was partially offset by better performance in the commercial segment.
Overall, earnings for the US health segment remained flat, but the margin narrowed significantly. Reinsurance has been used to mitigate the impact of these lower earnings on capital, allowing for continued premium growth. Given the current interest rate environment and the high cost of debt, reinsurance has become a more attractive option for supporting capital needs.
The COVID-19 pandemic had a significant impact on the health insurance segment over the past few years. During the first two years of the pandemic, both US and global health insurers experienced elevated earnings due to lower utilization of claims. Lockdowns and general precautions led to fewer doctor visits and postponed elective medical care, while people continued to pay premiums.
However, by late 2022, health insurance saw a return to traditional patterns of medical care, along with pent-up demand from COVID-related disruptions. Additionally, there was an increase in the severity of claims due to late or incorrect diagnoses, particularly in cases involving cancer and heart disease.
From the perspective of reinsurers, the first two years of the pandemic were beneficial for the health care segment, helping to offset losses in the mortality segment from COVID-19. However, the recent trends in health insurance and uncertainty regarding future utilization and claims severity have led some global reinsurers to reconsider their growth plans in this segment.
Regarding which health insurance segments are ceding the most premiums to reinsurers, Pliss notes that in the US, the top three segments are commercial, Medicaid, and Medicare Advantage.
Over the past decade, most ceded premium has come from government programs due to robust growth and limited earnings. However, in the past three years, the commercial line of business has significantly contributed to growth, with commercial ceded premium reaching $20 billion in 2023, compared to $12 billion in 2021.
This increase is partly due to losses in the commercial segment in 2021 and 2022, particularly in individual exchange products. Reinsurance arrangements helped alleviate pressure and support capital during this period.
For Medicaid, which ranks second in terms of ceded premium, most premium is ceded to affiliates, with large carriers utilizing their corporate structures to distribute premium and optimize capital.
In lines of business where premiums are ceded to non-affiliates, commercial, Medicare Advantage, and medical stop-loss segments stand out. While medical stop-loss is relatively small in volume compared to commercial and Medicare Advantage, it is a heavier user of reinsurance due to a disproportionate impact from high-cost claims.
The rising number and cost of claims hitting reinsurance for stop-loss have led to a significant hardening of reinsurance rates in that segment.
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