Per risk medical reinsurance rates for working layers sustained a wide range of increases, based on actual experience of the underlying business. Average increases ranged from 12 percent to 15 percent, but with considerable outliers.
With more and more claims hitting in excess of one and even two million, these layers can almost be considered working as well. However, experience is quite volatile, and experience rating this year has driven rate changes from down 40 percent to over 250 percent.
The primary concerns in the medical insurance market are related to emerging changes from health care reform. Unlimited lifetime maximums, increasing annual maximums, managing increased minimum medical loss ratios, no pre-existing condition exclusions and more liberal age limitations for covered minors are among the factors that could affect carriers. Primary rates are constrained by regulatory approval and often do not reflect true underlying inflation in costs of coverage.
A large segment of the market is focused on Medicare and Medicaid, with the latter expected to grow significantly due to health care reform changes. In this market, hospital costs are expected to grow between 10 percent and 15 percent. However, physician costs are expected to remain flat or even decrease in some cases due to tighter allowable government reimbursement rates.
Concerned with the unlimited lifetime maximums, many insurers are exploring excess of loss coverage that protects against this risk, and markets are responding. It is becoming common for companies to buy high layers either with a big limit such as USD10 million or even unlimited coverage. Claims have not yet hit these levels in numbers to give any practical modeling guidance. Rather, pricing is more catastrophe-based, with unlimited coverage excess of USD5 million quotes converging to between .20 and .25 per member per month.
As the coverage available is on a risk attaching basis, it does not provide perfect protection for high multi-year claims. This problem will be exacerbated as annual maximums are phased out in 2014. We expect and support continued product development on multi-year and loss occurring products that can better address underlying risks.
Capital markets solutions for managing aggregate exposures came to the market. Similar to extreme mortality bonds, this cover responds to significant shifts in underlying experience, but without much of the basis risk and timing issues present in those structures. The cover attaches well out of the money and can be expected to react only to very sizeable increases in loss such as a pandemic.
The market remains hungry, with both new entrants and existing markets becoming more aggressive. Primary companies are being squeezed between low approved rate increases and higher reinsurance increases. Where possible, they are looking to increase retentions rather than pay an increasing share of their revenue for reinsurance. This forces reinsurers to push hard for the best business, keeping increases below trend in most cases.
The new interest in unlimited coverage for stop loss programs led to some speculation
whether there would be sufficient capacity for these layers. However, after some initial
resistance, a few reinsurers offered the cover, but required participation in lower layers or even within retention. However, other markets soon rushed to fill the vacuum and some of the initial requirements have been relaxed.