The impact of the COVID-19 pandemic on self-funded health plans has been experienced more as a series of ripple waves rather than a forceful pricing tsunami.
Overall, the cost of most individual COVID-19 claims is not considered very serious from a medical stop-loss (MSL) or excess insurance perspective. A bigger problem for employers and primary insurers has been the increased frequency of COVID-related claims at the benefit “plan level”. While pandemic-related claim frequency has increased, claims attributable to more routine, elective and non-emergency procedures have decreased. It is still early to be able to determine how healthcare plans will finish out their plan year from a loss perspective, but the increase in COVID claims will be significantly offset by the reduction in the routine procedure claims. Some benefit plan sponsors are, however, preparing for a possible scheduling surge in procedure scheduling during the fourth quarter.
As the primary (or working) layer of coverage, the employer benefit plan will experience most of the direct claims volatility as opposed to the stop loss layers. Because the minimum specific deductible for most self-funded plans is $25,000, including group MSL captive participants, which is well above the cost of most COVID-19 claims, I do not expect that the stop-loss, including captive, layers will experience a material increase in claims activity attributable to COVID. About the only COVID-related effects to the MSL market has been a decrease in movement of renewals to new carriers since the pandemic incepted in February.
Medical stop-loss market implications
The overall medical stop-loss market, however, has been experiencing a very gradual – almost subtle – firming over the past few years; a trend that was emerging well prior to the pandemic.
The profit performance of most commercial MSL carriers has been fairly week for several years. Based on data reported by carriers to the National Association of Insurance Commissioners (NAIC), the MSL industry overall has been running at a 79 percent loss ratio on a gross basis for the past three years with further deterioration expected for the 2019 year. This converts to the high 90s (over 100 percent for some) on a net basis. These razor-thin margins are more bearable for carriers having large MSL portfolios but not easy to tolerate for the smaller MSL carriers.
What to expect in 2021
I hesitate to say that we will be seeing a hard MSL market in the coming year. The MSL market will remain competitive for employers having a favourable loss history track record however, carriers will be much more discerning in their risk selection and rating as they try to ameliorate the performance of their MSL portfolios. Most of the market will experience a significant firming to their MSL rates.
More than 60 percent of the employers in the MSL market have a 1 January effective date. The renewal underwriting for January accounts typically begins in mid-August and is in full-force through mid-November. Given the recent market results and remaining uncertainty of the overall long-term impacts of the pandemic, which are still somewhat immature, it is going to be very interesting to see how the MSL market is going to respond relative to renewal pricing for the coming January underwriting season.
Captive implications
A well-known alternative risk proverb (or maybe it was an underwriter in an Irish pub) advises to “transfer risk in a soft market – retain risk in a hard market”. In general, this is pragmatic advice; however, a properly structured self-insurance programme will mitigate an employer’s vulnerability to fluctuating market conditions and enhance long-term rate consistency. Using a captive to assume well-defined segments of MSL risk can amplify the benefits of self-funding and further stabilise rates on a long-term basis. My expectation is that more small- and mid-sized employers will elect to self-insure and participate in group captives for their MSL coverage. The shared risk or pooling nature of group captives helps smaller and mid-sized self-insureds achieve the consistency levels and long-term rate stability that would be otherwise difficult to reach on a stand-alone basis. For larger employers, converting segments of retained risk into layers of MSL coverage and formalising the funding of those layers via premiums paid to a captive can deliver numerous advantages (for example, enhance risk diversification, cash flow, establish reserves, etc.) across an enterprise-wide risk management programme. MSL captives have been among the industry’s most significant growth segments for several years and this will continue for the foreseeable future.
