AIS RISK CONSULTANTS, INC.

Transcription

1 AIS RISK CONSULTANTS, INC. Consulting Actuaries Insurance Advisors 4400 Route 9 South Suite 1200 Freehold, NJ (732) Fax (732) Date: July 8, 2010 To: Steve Oslund, Chair Accident & Health Working Group PPACA Subgroup From: Allan I. Schwartz, on Behalf of the NAIC Consumer Representatives Re: Comments on IRD018 Reinsurance Set forth below are some comments regarding the issue of whether private reinsurance purchased from other insurance companies should be reflected in the rebate calculation. My conclusion is that the rebate calculation should be on a direct basis before consideration of private reinsurance purchased from other insurance companies. This is based upon: (i) my understanding of the PPACA legislation as written, (ii) my understanding of the intent of the PPACA legislation and (iii) the potential for abuse if private reinsurance is allowed in the rebate calculation. PPACA WORDING Does Not Include Private Reinsurance in the Rebate Calculation Section 2718(a) entitled Clear Accounting For Costs lists three categories of information for which data needs to be provided. Those are: (1) Reimbursement for clinical services provided to enrollees under such coverage (2) Activities that improve health care quality (3) All other non-claims costs, including an explanation of the nature of such costs, and excluding Federal and State taxes and licensing or regulatory fees. To the extent that reinsurance falls into any of these categories, it would be (3). Reinsurance is clearly not either (1) reimbursement for clinical services provided to enrollees under such coverage or (2) activities that improve health care quality. To the extent reinsurance is reflected anywhere in such accounting it would be as a non-claims cost. Treating reinsurance as a non-claims cost is consistent with Actuarial Standard of Practice No. 29, EXPENSE PROVISIONS IN PROPERTY/CASUALTY INSURANCE RATEMAKING which states in part 1 : 1 A copy of ASOP 29 is included. Health insurance can be sold by property / casualty insurance companies, and hence in my opinion ASOP 29 is applicable to health insurance.

2 July 8, 2010 Steve Oslund Page 2 of Provision for Reinsurance The actuary may elect whether to include the cost of reinsurance as an expense provision. If a provision for reinsurance is included, the actuary should consider the amount to be paid to the reinsurer; ceding commissions or allowances; expected reinsurance recoveries; and other relevant information specifically relating to cost, such as a retrospective profitsharing agreement and reinstatement premiums between the reinsured and the reinsurer. (emphasis provided) Section 2718(b)(1)(A) indicates that the only items to be reflected in the rebate calculation are (1) and (2). Item (3), which may include the cost of private reinsurance, is not part of the rebate calculation. An alternate argument that insurance companies may use is that reinsurance should not be included as an expense, but instead that the reinsurance loss reimbursements are an offset to item (1) and the reinsurance premiums are an offset to premium revenue. Such an argument would also be contrary to PPACA. Section 2718 (b)(1)(b)(i)) indicates that the rebate amount calculation is a percentage multiplied by a premium amount. That premium amount is defined by the statute as the total amount of premium revenue (excluding Federal and State taxes and licensing or regulatory fees and after accounting for payments or receipts for risk adjustment, risk corridors, and reinsurance under sections 1341, 1342, and 1343 of the Patient Protection and Affordable Care Act) for such plan year. Hence, the statute explicitly lists the items that are excluded from the total amount of premium revenue. The rule of statutory construction Expressio unius est exclusio alterius (The express mention of one thing excludes all others) means that items not on the list are assumed not to be covered by the statute. Since the listing of items that can be excluded from the total amount of premium revenue does not include private reinsurance, the conclusion is that private reinsurance premiums cannot be deducted from the total amount of premium revenue. Therefore, a calculation which removes reinsurance reimbursements from losses and reinsurance premiums from total premium revenue would be contrary to the express meaning of the statute.

3 July 8, 2010 Steve Oslund Page 3 of 5 PPACA INTENT Does Not Include Private Reinsurance in the Rebate Calculation There is no doubt that the intent of PPACA includes bringing down the cost of health care coverage, ensuring that consumers receive value for their premium payments and requirements to provide value for premium payments. These goals are to be achieved in part through the rebate process, by ensuring that a certain percentage of the premiums paid by consumers go towards benefiting consumers in the form of either (1) reimbursement for clinical services provided to enrollees under such coverage or (2) activities that improve health care quality. From the point of view of the consumer, it does not matter whether these percentage targets are not reached as a result of excessive executive compensation, inflated overhead expenses or reinsurance costs. Under PPACA consumers are entitled to receive a certain percentage of the premium paid back in the form of specified benefits. If an insurance company is not reaching this target percentage because of reinsurance transactions, then consumers should NOT be penalized, in the form of decreased rebates or no rebates, for that practice by insurance companies. If private reinsurance transactions were reflected in the rebate calculation, that would frustrate the intent of PPACA to have a minimum amount of premium going to benefit of consumers. Potential for Abuse if Private Reinsurance is Allowed in the Rebate Calculation If private reinsurance ceded is allowed in the rebate calculation, but private reinsurance assumed is not included 2, then it would be a relatively simple matter for insurance companies to manipulate accounting practices and reports in order to ensure that a rebate would never be paid. A simple example of how this can be accomplished follows. All that would be needed would be for an insurance company (A) to set up an affiliated insurance company (B), with company (A) writing the health insurance business directly to consumers and company (B) providing reinsurance to company (A). The price for the reinsurance could be set in such a manner that all the premiums of company (A) which were in excess of 125% 3 of retained losses 4 were transferred to company (B). In such a case company (A) would have an 80% loss ratio and would not have to pay a rebate. Furthermore, any profits in company (B) would be exempt from the rebate process, since the premiums and losses in company (B) are on assumed reinsurance 2 It is my understanding that there is a consensus in this subgroup that assumed reinsurance is not covered by the PPACA % = 1.0 / 80% 4 When referring to losses in this section we mean the combination of items (1) and (2) of Section 2718(a).

4 July 8, 2010 Steve Oslund Page 4 of 5 business which is not subject to the rebate calculation. If there were two (or more) insurance companies in the insurance group, it would be an even easier process to avoid paying rebates. There would not be a need to set up a separate affiliated insurance company to provide the reinsurance. Instead company (W) could reinsure company (X) and company (X) could reinsure company (W). Each company would cede away sufficient premiums to the other company so that on the retained business the loss ratio standard would be achieved. And neither company would need to pay a rebate on any of the profits from the assumed reinsurance, since that is not subject to the rebate process. Even if the reinsurance were with an outside unaffiliated reinsurance company there is still a high potential for abuse. If company (Y) was the direct insurance company providing health care coverage to consumers and company (Z) is the unaffiliated reinsurance company providing reinsurance to company (Y), the transaction could still be set up to prevent rebates from being paid. For example, company (Y) may need reinsurance on both its health insurance business and its life insurance business. Let us say that a fair price for these two reinsurance agreements was $100,000 and $200,000; respectively, so that company (Z) wants to collect $300,000 in total from company (Y). Instead of reflecting the fair prices in the accounting records, the transactions could be recorded with a reinsurance premium of $250,000 for the health reinsurance and $50,000 for the life reinsurance. In that way company (Z) stills get the total $300,000 it wanted, but company (Y) gets to deduct an excessive health insurance reinsurance premium from the rebate calculation and thereby inappropriately avoids paying a health insurance rebate. There are many other possible ways that the transaction between company (Y) and company (Z) would inappropriately inflate the recorded value for the ceded reinsurance premium and thereby distort and abuse the rebate process. For example, company (Y) could pay an artificially excessive reinsurance premium to company (Z) which would inflate the reported loss ratio for company (Y) thereby avoiding any rebate. Separate from that process, the excessive reinsurance premium could be offset by company (Z) paying an inflated ceding allowance to company (Y) or through some other type of transaction between company (Z) and company (Y) which would funnel back some portion of the excessive artificial reinsurance premium back to company (Y). In summary, allowing private reinsurance to be part of the rebate calculation would be: Contrary to the wording of PPACA Contrary to the intent of PPACA

5 July 8, 2010 Steve Oslund Page 5 of 5 Subject to abuse and distortion which would lessen or eliminate rebates Please feel free to contact me if there is anything you would care to discuss.

6 ACTUARIAL STANDARD OF PRACTICE NO. 29 EXPENSE PROVISIONS IN PROPERTY/CASUALTY INSURANCE RATEMAKING STANDARD OF PRACTICE Section 1. Purpose, Scope, and Effective Date 1.1 Purpose The purpose of this standard of practice is to provide guidance to actuaries in estimating costs for property/casualty insurance ratemaking other than (1) incurred losses, (2) the provision for profit and contingencies, (3) investment expenses, and (4) federal and foreign income taxes. 1.2 Scope This standard of practice applies to all property/casualty insurance coverages. This standard also applies to property/casualty risk financing systems, such as selfinsurance, that provide similar coverages. References in the standard to risk transfer should be interpreted to include risk financing systems that provide for risk retention in lieu of risk transfer. 1.3 Effective Date This standard will be effective with respect to work performed after December 1, Section 2. Definitions The definitions below are defined for use in this actuarial standard of practice. 2.1 Commission and Brokerage Fees Compensation to agents and brokers. 2.2 Expense Limitations Legislative or regulatory rules that disallow or limit certain categories of expenses in determining rates. 2.3 General Administrative Expenses All operational and administrative expenses (other than investment expenses) not specifically defined elsewhere in this section. 2.4 Loss Adjustment Expenses (LAE) All expenses incurred in investigating and settling claims. 2.5 Other Acquisition Expenses All costs, other than commission and brokerage fees, associated with the acquisition of business. 2.6 Policyholder Dividends Nonguaranteed returns of premium or distributions of surplus. 1

7 2.7 Premium-Related Expenses Those expenses that vary in direct proportion to premium, e.g., premium taxes. These expenses are sometimes referred to as variable expenses. 2.8 Rate An estimate of the expected value of future costs. 2.9 Residual Market Provision A provision for the entity's costs that represents its share of residual market profits or losses Statutory Assessment Provision A provision for the entity's costs stemming from any mandated assessment Taxes, Licenses, and Fees All taxes and miscellaneous fees except federal and foreign income taxes. Section 3. Analysis of Issues and Recommended Practices 3.1 Categorizing Expenses The actuary should be familiar with the pertinent requirements for defining expenses, such as those prescribed in the Instructions for Uniform Classification of Expenses, published by the National Association of Insurance Commissioners (NAIC), or Regulation 30 of the New York State Insurance Department. The actuary should also be familiar with the entity's own methods of classifying and assigning expenses. 3.2 Determining Expense Provisions The actuary should determine the provisions for loss adjustment expenses; commission and brokerage fees; other acquisition expenses; general administrative expenses; and taxes, licenses, and fees that are appropriate for the policies to be written or coverages provided during the time the rates are expected to be in effect. In addition, where appropriate, the actuary should consider subdividing the expense categories. Expense provisions should reflect the conditions expected during the time these policies or coverages are expected to be in effect and should include all expenses expected to be incurred in connection with the transfer of risk. For expenses other than premium-related expenses, the actuary should consider estimating these expenses on a basis that is not directly proportional to premium, such as per policy, per coverage, a percentage of claim losses, or per unit of exposure. Studies or actuarial judgment may support such estimates. 3.3 Start-Up Costs The actuary may amortize start-up or development costs using an appropriate amortization period. 3.4 Expense Trending In determining the future expense components of the rate, the actuary should be guided by Actuarial Standard of Practice (ASOP) No. 13, Trending Procedures in Property/Casualty Insurance Ratemaking. 2

8 3.5 Policyholder Dividends The Statement of Principles Regarding Property and Casualty Insurance Ratemaking of the Casualty Actuarial Society (CAS) classifies policyholder dividends as an expense to operations. When the actuary determines that policyholder dividends are a reasonably expected expense and are associated with the risk transfer, the actuary may include a provision in the rate for the expected amount of policyholder dividends. In making this determination, the actuary should consider the following: the company's dividend payment history, its current dividend policy or practice, whether dividends are related to loss experience, the capitalization of the company, and other considerations affecting the payment of dividends. 3.6 Residual Market and Statutory Assessment Provisions The actuary should include a provision in the rate for any residual market costs or statutory assessments expected to occur during the period of time the rates are expected to be in effect. If these costs are assessed retrospectively, it may be appropriate to include a provision to recover these costs to the extent they were not included in previous rates. 3.7 Provision for Reinsurance The actuary may elect whether to include the cost of reinsurance as an expense provision. If a provision for reinsurance is included, the actuary should consider the amount to be paid to the reinsurer; ceding commissions or allowances; expected reinsurance recoveries; and other relevant information specifically relating to cost, such as a retrospective profit-sharing agreement and reinstatement premiums between the reinsured and the reinsurer. Section 4. Communications and Disclosures 4.1 Conflict with Law or Regulation The rate filed with a regulator may differ from an actuarially determined rate because of expense limitations. If a law or regulation conflicts with the provisions of this standard, the actuary should develop a rate in accordance with the law or regulation, and disclose any material difference between the rate so developed and the actuarially determined rate to the client or employer. 4.2 Documentation The actuary should be guided by the provisions of ASOP No. 9, Documentation and Disclosure in Property and Casualty Insurance Ratemaking, Loss Reserving, and Valuations. 4.3 Deviation from Standard An actuary must be prepared to justify the use of any procedures that depart materially from those set forth in this standard and must include, in any actuarial communication disclosing the results of the procedures, an appropriate statement with respect to the nature, rationale, and effect of such departures. 3