It has been a little over four years since the enactment and subsequent implementation of the Patient Protection and Affordable Care Act, more widely known as the ACA. The impact on the insurance industry as a whole has been tremendous, but it has not been shared equally among the industry subsectors. While the property/casualty (P&C) industry was not exactly spared, receiving a comparatively “light touch,” the ACA has been a catalyst helping create a transformational bridge between the P&C and the health insurance industries.
With relatively few exceptions, health insurers were able to have meaningful control over their customer populations and were, therefore, primarily focused inward - studying their own experiences and underwriting and claims/loss data to garner deeper insights into their businesses. With the significant reductions in the ability to select risks and to charge actuarially appropriate rates at all levels that resulted from enactment of the ACA, health insurers have to look beyond historical data to develop new tools for forecasting and planning. Fortunately, this is not completely new ground. P&C insurers have routinely accessed or developed sophisticated toolsets, with an emphasis on looking beyond their own experiences. Over the past two decades, availability and utilization of data has allowed for significant advancements in risk selection, margin pricing and avoiding catastrophic losses. The modeling techniques and simulation platforms that P&C insurers use to bring disparate inputs together to evaluate complex strategies have evolved over time. Similar techniques are only now being developed to help health insurers evaluate enterprise risk.
An industry emphasis on enterprise risk management and Own Risk and Solvency Assessment (ORSA) has further fueled this desire to look beyond recent experience and what direct competitors and peer companies are doing. The toolsets, techniques and technology used to identify, mitigate and transfer risk for P&C carriers are sought more than ever in the health insurance sector.
Because of the relative short duration and tail of health insurance products, health insurers may gain tremendous insight from developing similar reserving and rate setting platforms currently utilized in the P&C sector. Combined with the need to better manage capital adequacy for statutory purposes given increased scrutiny over large rate increases and minimum loss ratio requirements, a robust approach is needed.
While the P&C industry may have been an early adopter of these approaches, it was only through key advances in technology such complex systems were feasible. Enabling technologies, such as computing power, capacity and compression capabilities were not lost on health insurers - they were focused merely on better coordination and delivery of care.
From utilizing access to warehoused datasets to modeled catastrophe losses to investment and financial simulations, health insurers are now looking to better forecast the impacts of unforeseen, unexpected or otherwise unexplained events. The P&C industry spent decades tailoring technology to drive improved insights into risk. That drive is now front and center for health insurers following the ACA enactment.
From the portfolio management lessons learned during Hurricane Andrew to the growing understanding of the need to simulate multiple shocks to an enterprise, P&C entities continued to evolve. The passage of the ACA was a tremendous catalyst within the health insurance industry that resulted in increased importance of volatility management at an enterprise level. When overlaid with a growing emphasis on ORSA for the entire insurance industry, cross communication and learning between P&C and health lines will pay tremendous dividends in understanding and managing risk. In the near future, while the P&C industry will continue to innovate - using robust models, parameterized with data and techniques beyond any individual company’s purview, health insurers will be watching carefully, adopting these strategies at an increasing pace. They have started to, and will continue to, analyze and assess concentrations or correlations of various risks. Health insurers, confronted with an asymmetric risk picture, have shifted the emphasis to creating more cohesive and coordinated strategies for enterprise risk management.