Taking the pulse of medical­ stop­­-loss

An increasing number of Cayman-based captive insurance companies are involved with the medical stop-loss (MSL) market, which deals primarily with business from the US. Captive International spoke to Philip Giles, managing director of MSL Captive Solutions, to discuss the current state of the market, a year on from the last edition of Cayman Focus.

Have there been any regulatory reforms to address spiralling costs of healthcare?

A few relevant regulatory updates in the US over the past year could affect self-funded plans and stop-loss coverage. The Home Dialysis Act facilitates more accessible access to lower-cost dialysis options, and the No Surprises Act eliminates surprise or balance billing for emergency out-of-network treatments. Both help reduce plan costs, but these are only the proverbial drop in the bucket in addressing healthcare costs.

Is the MSL market still as competitive as it has been?

The MSL market is highly competitive, and I expect it to stay that way for the foreseeable future. The last truly “hard” market in MSL was more than 20 years ago, around the start of the millennium. The overall market at the time was seriously underperforming and simultaneously shifting from managing general underwriters towards more direct carriers as the predominant writers of MSL.

Even though the market results have not been favourable over the past several years, I expect only a moderate rate firming rather than a widespread market hardening. I don’t think the current stop-loss market should be referred to as “soft”, as it has been at a high level of competitiveness for more than 20 years. This is simply the level of competitive market reality that underwriters need to respond to in determining how to write business at a profitable level.

Did the systemic MSL market remediation continue?

The National Association of Insurance Commissioners (NAIC) “Accident and Health Policy Experience Report” for the 2021 underwriting year shows that the overall stop-loss market has continued to deteriorate even more significantly from the previous year. Underwriters are still pushing for higher technical rates and hoping for at least enough of an increase to cover medical inflationary trend on good accounts; however, unrelenting market demands have continually pressured new business and renewals to continue compressing rates below where they should be in most cases.

Among the more significant findings that I have been able to pull from the NAIC report are as follows: The industrywide gross loss ratio for the 2021 underwriting year deteriorated from 80.49 percent in 2020 to 83.53 percent in 2021. The top 10 stop-loss writers (which control 70 percent of the market) tracked closely with the overall market and, collectively, deteriorated from 81.95 percent to 83.56 percent.

It is worth noting that these results are reported as gross loss ratios rather than net loss ratios, which makes them even more distressing. The net loss ratios would include the carrier’s administrative, operational, and acquisition expense retention and would be a more accurate reflection of profitability. Based on the reported gross loss ratios, much of the stop-loss industry is running well above 100 percent on a net basis.

The most interesting—and impressive—item from the NAIC report is the exceptional performance of carriers that are meaningfully engaged in captive business in relation to the overall stop-loss market. In reviewing the results of what I believe to be the top 10 stop-loss carriers engaged in the captive insurance segment, the collective loss ratio of these carriers is 68.19 percent in 2021, which is down from 72.97 in 2020.

I should mention that this is based strictly on an unweighted empirical analysis and not on anything other than an implicit observation. Stop-loss carriers do not segregate their captive underwriting results from their traditional stop-loss results in reporting to the NAIC. However, this observation presents an interesting, and perhaps more than anecdotal, correlation between having a significant captive portfolio and improved underwriting results.

Historically, MSL captives have outperformed traditional stop-loss in both loss ratio and renewal persistency. Tightly managed participation requirements and prudent risk selection lead to a better-performing risk pool. Employer participation in increased risk assumption and collateralisation contributes to higher engagement, profitability, and persistency levels. More discerning participation guidelines will also lead to better performance. It is logical to assume that carriers having a significant amount of captive business will ultimately outperform the market average.

What is causing/contributing to the continued market deterioration?

There are several reasons for the continued market deterioration. Among the most significant are:

Specific deductibles: An inordinate number of employers have specific deductibles that are set too low for their size. This has been more prevalent with newer self-funded accounts and captives focusing primarily on transitioning smaller employers from fully insured coverage to self-insured structures. The trend has increased as the number of new self-insured accounts in the market grows.

Generally, a specific deductible should be set at 10 to 15 percent of expected annual claims. In many instances, specific deductibles are being positioned closer to 5 percent, meaning more claims will penetrate the specific layer. A more appropriate specific deductible will achieve greater stability for the self-funded plan and the stop-loss carrier.

No new laser (NNL) contracts with rate cap provisions: These contracts may be the most significant contributor to the continued market deterioration over the past several years. One of the basic principles of any alternative risk programme is assuming predictable (known) segments of risk while transferring more unpredictable (unknown) risks to insurers. The underlying premise is that a known or “expected” risk can be budgeted and held more efficiently as retained risk by the employer rather than transferring it, redundantly, to an insurer at a higher-cost fixed premium.

Simply stated, when a carrier cannot isolate (laser) a known condition for a higher deductible or charge an adequate premium to cover the known risk, it will eventually lose money. To their own detriment, carriers have been too liberal in their willingness to issue these provisions. Some underwriters are now becoming more judicious in their selectivity in allowing them. Carriers should not allow NNL and rate cap provisions without the insured’s adoption of specific cost reduction initiatives.

Regarding captives, I discourage NNL and rate cap provisions in most cases. A captive programme needs to understand that it is in a true risk-sharing partnership with its stop-loss carrier. Claim liability, resulting from large claims that cannot be lasered (NNL contracts), and insufficient premium to offset risk (rate cap), will be absorbed by the stop-loss carrier with a commensurate portion transferred to the captive as a reinsurer.

This will ultimately dilute the captive’s profitability and reduce the ability to achieve long-term rate stability for members.

Increased large claims: Over the past decade, the frequency of large, catastrophic claims has surpassed the market’s ability to adequately price for these more unpredictable losses. Several factors contribute to increases in large losses: post-Affordable Care Act increases in health system chargemasters; unregulated definitions for specialty pharmaceutical designations; and emerging injectable and infusion therapies are among the primary cost drivers. Post-COVID-19 mental health issues have also made it into the top 10 high-cost conditions for several carriers.

Did rates firm up enough, and how would you describe the market now?

We have seen only a slight firming of rates over the past year. Given the stop-loss market’s performance results of the past few years, it is reasonable to expect a more significant attempt at an underwriting amelioration and increased rates from most carriers.

We are seeing this occur as we’re into the heavy 1/1 underwriting season. Nearly 65 percent of the stop-loss market has a 1/1 effective date, which will serve as a harbinger of where the market is probably heading.

Self-funded employers with a good loss history probably have a better chance of attaining long-term rate stability by participating in a group captive with an established and stable performance record and a robust cost-reduction platform. Short of captive participation, it is probably more beneficial to purchase traditional stop-loss from a carrier active in the captive segment with a better performance history in this line of business.

Two years after COVID-19 hit, what has been the impact on MSL captives?

COVID-19 has had some direct impact on the stop-loss market. However, the more significant effect has come from the more indirect (proximate cause) and latent conditions associated with COVID-19. These can involve heart conditions, cancers and multisystem inflammatory issues involving several different organs that may not be immediately diagnosed. Delayed diagnosis or deferred treatment has led to an increase in severity in some cases.

A corresponding scheduling boom of the delayed/deferred treatments may have also contributed to the increased claim frequency of most carriers. As mentioned earlier, COVID-19-related mental health has moved into the high-cost claim list. The real, long-term effects of COVID-19 are becoming more apparent but may not be fully realised for several years.

How do you see the current state of the MSL captive market?

MSL captives have been among the insurance industry’s premier growth segments for several years. Our research suggests that group MSL captives currently represent more than $5 billion of the overall ($27 billion) MSL market, with significant growth expected to continue. It’s not unreasonable to project group captives accounting for well more than 25 percent of the total MSL market within the next few years.

MSL captives that employ sound risk selection (membership) guidelines and have a platform based on medical cost and risk reduction initiatives will continue to outperform the traditional stop-loss market and deliver exceptional results for their members.