SIIA 30 th Annual National Educational Conference An Independent View of the Stop Loss Market Today October 14, 2010 Actuarial Management Strategies, Inc. AMS Presented by: Alison J. Saifer, FSA, MAAA

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Background: Alison J. Saifer, FSA, MAAA Health Care Consultant (Actuarial/Financial/Business) for: Reinsurance Companies Direct Carriers MGUs Attorneys Investors

Recent Experience Review Approximately $1 Billion in Stop Loss Experience per Year Perform 8 – 10 Employer Stop Loss Program Audits per Year for a Variety of Different Clients Perform Facultative Underwriting for Large Cases Program Underwriter for Reinsurance Companies Annual Detailed Review of Most Popular Medical Stop Loss Manual Expert Witness Work for Employer Stop Loss Deals Gone Bad Stop Loss Program Reviews for Financial Investors

Overview Employer Stop Loss Market State of the Employer Stop Loss Market STILL a soft market cycle Existing and new capacity continue to seek growth or maintain market share Signs of softening aggregates Most programs are not meeting profit objectives Blues and Direct carriers continue to increase market share

State of the Employer Stop Loss Market Large Profits Achieved in Early 2000s are History 2004 Small Profits or Losses by Many Carriers 2005 – 2006 Market Shifts from Hard Market Market Gets More Competitive Each Year 1/1s – Still No Sign of Hardening Market

Recent Market Cycles Hard Market Soft Market

Previous Optimism Hasnt Panned Out According to a Special Report Issued by A.M. Best in October 2006, Medical Stop Loss Market May Show Signs of Hardening in 2007 Reinsurers exiting the market Consolidation with insurers purchasing MGUs (i.e. HCC purchasing Perico in 2005 and Allianzs U.S. Health Products Division) Increasing loss ratios will result in more conservative underwriting and higher prices But the MGU/Reinsurance Market is a Smaller Piece and No Longer Driving the Market

Existing and New Capacity Seeking Growth Many Insurers/Reinsurers Still Have an Appetite for this Class Some Players Believe that Health Care Reform will Result in New Opportunity for Stop Loss Some New Players Start-up MGUs Xchange Benefits New/Expanded Insurance/Reinsurance capacity RGA Beazley

Market Shifts Munich Re America Acquires Cairnstone in 2007 ($80 million) 2007 Non-renews 4 MGU stop loss partners (>$100 million) Reduction in staff managing stop loss 2009 once again expands by partnering with MGU markets Berkley Key Reduction in Staff in 2007/2008, then in 2009 Expands Staff Again Dedicated to Writing Stop Loss, Including Hiring a New President from Sun Life with Significant Stop Loss Experience Companion Purchases: Montgomery Management Corporation in 2007 International Specialty Underwriters in 2008 International Insurance Services, Inc. in 2009 Summit Reinsurance Services Inc. in 2010

Market Shifts (contd) Several BCBS Plans are Looking at Expanding Stop Loss Market Chubb Exits the Direct Division, but Stays in the Market Through Partners CV Starr Exits the Stop Loss Market, but new MGUs Springing up from ex-CV Starr staff (apparently with paper and reinsurance support) HM Insurance Group Acquires Mutual of Omahas Stop Loss Block ($100 million) Principal Financial Group Exits Self-Funded Medical with UnitedHealthcare Offering Renewal Policies

BCBS in Stop Loss According to a Recent Article Published in MyHealthGuide As of June 30, 2009 Blues plans and their affiliates insured million people through major medical plans… More than half of the Blues aggregate membership is through self-funded or administrative services only (ASO) plans. State Specific Blues Discounts and BlueCard make Claims Costs Lower than Most Competitors, with the Ability to Offer Lower Cost Coverage on a National Basis

Catastrophic Claims Catastrophic Claims are Getting Larger Catastrophic Claims are Occurring with Increasing Frequency Health care reform will escalate both frequency and severity by removing maximums Providers are known to manage to maximums for catastrophic claims

Catastrophic Claims are on the Rise According to a Presentation by Summit Re at ASNY in November 2009: Average size of claims over $1 million 2005 – about $1,200, – about $1,475,000 Probability of a claim over $1 million < – about – almost.00007

Mid-Size Claims on the Rise The Increase in Large Claims has Been Discussed for Years. But the News with Mid-Sized Claims Isnt Any Better. According to Munich Re America HealthCare Fall 2009 Newsletter: Between 2004 and 2008, the number of claims has increased 50% at the $50,000 level and 80% at the $250,000 level. Claims greater than $50,000 now make up more than 25% of the total average claim cost. Impacts stop loss trend!!!!

Catastrophic Claims How High Can Charges Get? HCR Has Not Addressed the Cost Side $5 million limit implies approximately $13,700/day x 365 days Charges in NJ average $12,000 - $15,000 per day How to Price When Limits Have Historically Been Less Add Cat charge Ignore extra cost, because dont believe it will happen Add extra cost, but reduce price with discretion Major Cat Events of Past 10 Years Have Had Minimal Impact on ESL Experience Luck? Losses also constrained with policy limits Its still not in the experience! Eventually There Will Be Impact 2011 may be small enough not to worry about

Underwriting is Too Aggressive Todays Market: Increased Competition on Lasers No laser or no laser at renewal policies are becoming common Additional costs for this product are being lost due to competition Large PPO Discounts Plus Underwriting Discretion Necessary to compete with BUCAs which have increasing share of the market Other Discounts Available Health Management programs have been certified for a 10% discount on specific stop loss coverage Competition on Aggregate Attachment Points Early Lock-In of Rates Some Companies Have You First Attitude, Waiting for Competition to Act More Responsibly in Rating Many Companies Trying to Figure Out How Heath Care Reform Will Impact Stop Loss

Competition on Aggregate Attachment Points Low Premium Will Not Absorb Claims Supposed to be Sleep Coverage Some players are pricing to a loss ratio Agents/Brokers are Selling on Aggregate Attachment Point as Well as Specific Premium and Lasers This Year More Aggregate Activity is Apparent in Audit Do We Remember the Underwriting Mistakes from the Late 1990s? BUCAs can Afford Lower Attachment Points as Their Claim Costs are Lower

What to Watch for on Aggregate As Underwriting Loosens on Lasers, Consider Potential Specific Claims Compared to Historic Number of Specific Claims Which Will Affect the Accumulation Health Care Reform May Impact, including Eliminating Cost Sharing for Preventative, Removal of Pre-Ex, Elimination of ER Pre-Cert Penalties, etc. Evidence that in the Past Years, First Dollar Trend is Materially Lower for HDHP, as Consumers Make Cost Conscious Decisions for First Dollar Care May reduce aggregate attachment points PWC estimates 2.5% lower trend CIGNA states their CDHP experience ½ the trend of HMO and PPO Wont last forever – enrollment is still low with positive selection and short term effect – people will still get sick

Trend First Dollar Trend has Been Relatively Consistent Over the Past Few Years 2010 Segal Health Plan Cost Trend Survey PPO Medical + Rx Projected 2010 trend – 10.5% Aon Summer 2010 Health Care Trend Survey PPO Medical + Rx – 2010 trend – 10.7% PriceWaterhouseCoopers Healthcare Cost Trends for 2010 All Plan Type Overall Projected 2010 trend – 9.0% But Leveraged Trend has Changed with Reverse Leveraging Occurring in Some Instances

Trend in Underwriting Most are Not Getting Trend (or Leveraged Trend for Specific!) at Writing or Renewal Some who are getting trend in prices, off-set with getting too aggressive on lasers Many are Not Using Actual Trend in Aggregate Attachment Points One trend does not fill all! Some Industry Manuals are Not Increasing by Leveraged Trend From Year to Year

Health Care Reform and Stop Loss Does Not Appear that HCR Will Affect Stop Loss for: Minimum loss ratios Lasering, disclosure requirements, medical underwriting Does Appear that HCR Will Affect Stop Loss for: Cover on family until age 26 track composition of family and average number of people covered No lifetime maximums Some Stop Loss carriers have announced (and many have implemented) intention to revise stop loss policies to increase plan maximums including no limit options Potential explosion of high cost claims when limits are increased or removed No rescissions Qualify for early retiree pool

Health Care Reform and Stop Loss Other Things to Consider Mandated coverage for biological Rx Employer must report value of coverage Clinical trial exposure

Market Size – Health Care Reform No Consensus on How Health Care Reform will Impact Total Size of the Stop Loss Market Some Believe that HCR will Increase the Size of the Market as Employers with Higher than Average Paid Employees Attempt to Keep Control of Health Care Costs These employees will not qualify for subsidies on the exchange May open opportunity for new/expanded product innovation, such as limited medical to fill some gaps and specialty carve-out products to limit employer exposures Very Large Employers will buy Stop Loss for the First Time due to Unlimited Benefits and Increased Liability for Catastrophic Claims

Market Size – Health Care Reform (contd) Others Believe that HCR will Decrease the Size of the Market as Reporting and Tracking Requirements for the Employers Become More Burdensome Lower paid employees will have incentive to move to exchanges Fees on Self-insured plans Presentation by Milliman saying they believe 10 – 20% of employers will move out of self-funded plans

Other Potential Changes to Market Transparency in Costs – Administration and Brokerage Taken Out of Insurance Costs Already happening Pressure on Providers for Transparency May Reduce the Differential by Network (Consumer Driven) No material effect yet Poor Results for Risk-Takers May Potentially Slightly Reduce Capacity Continued Consolidation

Chaos Breeds Opportunity How to Get New Groups or Keep Existing Groups Be prepared to help with administrative burdens for reporting by group Discount, discount, discount Without low claim costs, will not be able to compete Low expenses Directs operate at low expenses and leverage administrative services. Take administration and commission out of premium Specialty carve-outs may reduce employers first dollar aggregate risks

Thank You ! Alison J. Saifer, FSA, MAAA President (215) Actuarial Management Strategies, Inc. AMS