Two hats for reinsurers in health insurance

01 August 2012 Rajender Reddy, Robert Prochnow, Swiss Re

Reinsurers play two fundamental roles in health insurance. The first is a traditional insurance role, where the reinsurer supports the primary insurer directly through risk transfer, underwriting and expertise. And the second is the growing role that reinsurers play in driving innovation in the industry.

A large global reinsurer can pull together global resources to facilitate public private partnerships, encourage product innovation and extend insurability.

The traditional role

Given the relatively small size of individual health insurance claims it is unlikely that any single claim would prove unmanageable for a health insurance company. However, an unexpected number of large claims involving a new and expensive treatment could have an impact on the bottom line. Reinsurance coverage significantly reduces this volatility.

The preferred method of risk transfer from the primary risk carrier to the reinsurer will depend on the benefit sought by the insurer. For example, a quota share agreement, covering a percentage of the entire risk, minimises the capital strain of a growing line of medical insurance.

A well designed portfolio reinsurance program with several different reinsurance products can lower the volatility due to year-to-year deviations in the insurer's overall portfolio. Reducing volatility is crucial for self-insured health funds operated by certain employers and unions, for example.

Transferring risk to the "pool”

Aside from a risk-transfer function, reinsurers' expertise is a key factor for primary insurers. A reinsurer's knowledge of marketing approaches is particularly crucial for medical expense insurance given the requirement to integrate new covered lives into a medical risk pool. Recent trends include cross-selling from other products or client relationships and social-media marketing.

Underwriting is less developed for medical insurance than other insurance types. For the primary insurer it is important to keep up with underwriting standards to avoid getting too many of the bad risks. Difficulties may arise for a single primary insurer to develop and maintain a medical underwriting manual. Reinsurers can offer this service too.

Medical expense insurance is analysed differently than most other insurance experiences. Claims are smaller and more frequent, and health insurers have to add services to their benefit options over time. They also have to contend with unique challenges such as increases in charges per procedure and differences between regions and providers. Retaining a team of highly-skilled actuaries and the systems necessary to monitor these differences tend to be affordable only to the largest carriers.

Extending insurability

Reinsurers play an important enabling function in increasing insurability through innovation. Microinsurance is a good example of how innovation can work in the health insurance space. The Microinsurance Catastrophe Organisation (MiCRO), of which Swiss Re is a founding partner, brings together Microfinance Institutions, NGOs, the private and public sectors, and donors to develop innovative insurance solutions to manage catastrophic risk.

MiCRO is working to develop cholera protection for 60000 Haitian women micro-entrepreneurs and their families. To do so, MiCRO is developing an index trigger to calculate payments. Unlike traditional insurance, index-based policies do not require an assessment of actual impact before they pay out. In the case of Haiti, factors such as cholera-related hospital admittances and observable weather factors linked to cholera outbreaks can be used to determine pay outs.

Scalable index-based solutions

Once a certain level is reached a payout to the micro insurance policyholder is triggered. In addition, MiCRO insures the risk of mismatch between the index trigger and real losses on the ground. The result is a fast, efficient insurance solution with an emergency payout to the policyholders to cover their costs during a cholera outbreak. The MiCRO innovation is scalable and applicable to other markets too.

Schemes such as MiCRO are dependent on strong public-private partnerships in order to offer solutions that locally based health insurers may not be able to achieve on their own. In the case of MiCRO, local partners such as microfinance institutions aggregate micro risks, while international reinsurance organisations price, manage and retain the risks. Donors support program development and implementation.

Reinsurers have the ability to bring together governments, development organisations and business stakeholders. The result is that the benefits of health insurance reach individuals currently unable to access such protection.

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