STATE OF CONNECTICUT

Transcription

1 STATE OF CONNECTICUT INSURANCE DEPARTMENT ORDER ADOPTING REPORT OF EXAMINATION I, Anne Melissa Dowling, Deputy Insurance Commissioner of the State of Connecticut, having fully considered and reviewed the Examination Report (the "Report") ofthe Health Reinsurance Association (the "Association") as of December 31, 2011, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions, TO WIT: 1. I, Anne Melissa Dowling, as the Deputy Insurance Commissioner ofthe State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions oftitle 38a of the Connecticut General Statutes ("CGS"). 2. The Association is a domestic insurer authorized to transact the business of insurance in the State ofconnecticut. 3. On December 13, 2012, the verified Examination Report ofthe Association was filed with the Connecticut Insurance Department ("Insurance Department"). 4. In accordance with Section 38a-14(e)(3) of the CGS, the Association was afforded a period ofthirty (30) days within which to submit to the Insurance Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On January 9, 2013, the Association notified the Insurance Department of certain responses and comments on certain items contained in the Report. 6. Following review of the Report, it was deemed necessary and appropriate to modify the Report. A copy ofthe Report is attached hereto and incorporated herein as Exhibit A. P.O. Box 816 Hartford, CT An Equal Opportunity Employer

2 NOW, THEREFORE, it is ordered as follows: 1. That the Examination Report of the Association hereby is adopted as filed with the Insurance Department. 2. That the Association shall comply with all ofthe recommendations set forth in the Report, and that failure by the Association to so comply shall result in sanctions or administrative action as provided by Title 38a ofthe CGS. Dated at Hartford, Connecticut, this 18th day of January, 2013.

3 Exhibit A EXAMINATION REPORT OF THE AS OF DECEMBER 31, 2011 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 Salutation Scope of Examination History Organizational Chart Management and Control Significant Agreements Insurance Coverages Territory and Plan of Operation TABLE OF CONTENTS Page Information Technology and Controls Accounts and Records Financial Statements Admitted Assets Liabilities and Members' Accountability Statement of Operations and Changes in Members' Accountability Analysis of Examination Adjustments Premiums Receivable Professional and Other Expenses Payable Losses Reserves and Claims Payable Members' Accountability Recommendations Conclusion Signature

5 December 13,2012 The Honorable Thomas B. Leonardi Commissioner of Insurance State of Connecticut Insurance Department 153 Market Street, 6 th Floor Hartford, Connecticut Dear Commissioner Leonardi: In compliance with your instructions and pursuant to the requirements of Section 38a-14 ofthe General Statutes of the State of Connecticut (CGS), the undersigned has made a financial examination ofthe condition and affairs of the HEALTH REINSURANCE ASSOCIAnON (hereinafter referred to as the Association) an association created under the laws of the state of Connecticut and having its home and administrative office located at 628 Hebron Avenue, Glastonbury, Connecticut. The report of such examination is submitted herewith. SCOPE OF EXAMINATION Pursuant to Section 38a-556 of the CGS, an annual audit of the operations of the Association by an independent certified public accountant shall be performed and filed with the Commissioner of the Connecticut Insurance Department (the Commissioner). The audits are performed on a statutory basis. The Association is not required to file statutory financial statements as prescribed by the National Association ofinsurance Commissioners (NAIC). The previous examination was conducted as of December 31, 2006, by the financial regulation division of the Connecticut Insurance Department (the Department). The current examination, which covers the subsequent five-year period, was conducted at the home office of the Association. As part of the examination planning procedures, the Department reviewed the following materials submitted by the Association: Board of Director (Board) minutes from 2007 through the latest 2012 meeting. Audit reports from 2007 through 2011, completed by the Association's independent certified public accountants, Grant Thornton, LLP (GT). Claim reserve estimates prepared by Milliman, USA (Milliman) as of December 31, 2007 through December 31, Workpapers prepared by GT in connection with its 2011 annual audit were reviewed and relied upon to the extent deemed appropriate. A review of the independent audit reports and the

6 Department's financial analysis files indicated no material concerns with respect to financial condition, internal control over financial reporting, or regulatory compliance issues. The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NAIC Financial Examiners Handbook (the Handbook). The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Association by obtaining information about the Association, including corporate governance, identifying inherent risks within the Association, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with the Statutory Accounting Principles (SAP), and the NAIC Annual Statement Instructions for Health Companies (Instructions). All accounts and activities of the Association were considered in accordance with the riskfocused examination process. Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature. Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding. HISTORY The Association was established in 1975 as an unincorporated nonprofit association in accordance with Section 38a-556, chapter 700c, part IV of Title 38a of the CGS, for the purpose of promoting social welfare by ensuring the availability of comprehensive health care plans to residents of the state of Connecticut without regard to the condition of their health. The Association was the first high risk pool in the nation. The Association was initially administered by the Travelers Insurance Company, followed by The MetraHealth Insurance Company, and then United Healthcare Insurance Company (UHC). In 1999, Pool Administrators, Inc. (PAl) assumed responsibility as the administrator for the Association. PAl is a Subchapter S Corporation that administers the Association and approximately seven small employer health reinsurance pools for various states as well as the Senior Prescription Drug Assistance Program for the state of Maryland. All insurers and health care centers doing business in Connecticut, as a condition to their authority to transact applicable kinds of health insurance defined in Section 38a-551 ofthe CGS, shall be members of the Association. There are approximately 490 members subject to assessment, of which approximately 102 members contribute to the assessment. Member is required to participate in the direct business of the Association. Member assessments are made either retroactively or on an interim basis, based on the net loss of the Association. 2

7 Self-insurers that are. exempt from state laws related to employee benefits plans due to the Employee Retirement Income Security Act are not subject to assessment. Assessments include claims and operating expenses as provided for in the "Plan of Operation" (the Plan) of the Association. The Plan has been approved by the Commissioner. All funds held by the Association upon its termination, after payment of all claims and expenses of the Association, will be distributed for charitable, educational, or scientific purposes. ORGANIZATIONAL CHART The following is an organizational chart that identifies the relationship among PAl, the Association, and the various reinsurance pools: j;ool Administrators, Inc. (via Service Agreements Only) I Health Reinsurance Association (Connecticut) I I Reinsurance Pools (various states) MANAGEMENT AND CONTROL The Association has no employees. Under an administrative service agreement, PAl provides, for an administrative fee, essential services to the Association such as issuing policies, collecting and recording premiums, filing premium tax returns, and maintaining all accounting, administrative, and financial records. Pursuant to Section 38a-556 ofthe CGS, the Board shall be made up of nine individuals selected by participating members, at least two of whom have been appointed to represent Health Care Centers, subject to the approval of the Commissioner. The Board shall submit the Plan to the Commissioner to assure the fair, reasonable and equitable administration of the Association. The Association shall exercise its powers through the Board. Directors shall serve for a term of two years. The members elected to the Board shall elect a chair, a vice chair, a secretary, and such other officers from among its members as they deem necessary. The Board shall hold an annual meeting that includes the review of the Plan, rates for coverage issued, operating expenses, assessments, and any other matters deemed necessary for the 3

8 HEALTH REINSURANCE ASSOCIAnON administration of the Association. The Board shall hold other meetings, at such times and with such frequency as it deems appropriate, on the request of two or more Board members. A majority of the Board shall constitute a quorum for the transaction of business. The Board shall appoint, among the members ofthe Board, a nominating committee and an actuarial committee and may appoint a forms committee, a legal committee, a benefit committee, and such other committees as may from time to time be deemed necessary. Members of the Board serving the Association at December 31, 2011, were as follows: Director George Ripley, III, Chair John Bryson, Vice-Chair James Augur Kevin Grozio Kate Hall Will Jones Michelle Girton Title and Principle Business Affiliation Attorney at Law and Consultant, Sun Life and Health Insurance Company Director of Actuarial Services, Anthem Blue Cross & Blue Shield Vice President, Anthem Blue Cross & Blue Shield Director of Actuarial Services, Anthem Blue Cross & Blue Shield Director of Actuarial Pricing & Underwriting, United HealthCare Northeast Regional Actuary, Aetna, Inc. Actuarial Director Small Group Pricing, CIGNA HealthCare The executive officers serving the Association at December 31, 2011, were: Name Karl E. Ideman Richard 1. Larose, Jr. Alyson Ideman Title President Controller Director of Business and Administrative Services During the review of the Board minutes and documentation provided, it was noted that the Association's Board was made up of seven members, as of December 31, Article VII A (1) ofthe Plan states that "the Board of Directors shall be made up of nine representatives of Association members, at least two of whom have been appointed to represent Health Care Centers." It is recommended that the Association comply with Article VII A (l) ofthe Plan and increase its Board membership to nine. 4

9 Claims Administrative Servicing Agreement SIGNIFICANT AGREEMENTS The Association has a Claims Administrative Servicing Agreement with UHC to perform claim administration for Preferred Provider Organizations (PPO) and Special Health Care Plans (SHCP). Services performed by UHC include processing all claims submitted under the plans, making payments for all claims, keeping records of all claims, and preparing paid claim triangles for use in calculating incurred but not reports (IBNR) reserves. For its services, the Association compensates UHC on a per member per month basis. The Association reimburses UHC for the amount of claims paid by them on the Association's behalf. Line of Credit Agreement The Association has a revolving line ofcredit agreement with Bank of America that allows the Association to borrow up to $14 million to help finance its operations. The agreement is renewed annually. Administrative Services Agreement The Association has an Administrative Services Agreement with PAl to provide essential administrative services in connection with efficient implementation and functioning of pooling, reinsurance, and other arrangements under State individual, and small employer reform laws. Personal Service Agreement Pursuant to the Protection and Affordable Care Act, the State of Connecticut established a Temporary High Risk Pool (THRP). In August 2010, the Association entered into a contractual arrangement with the Connecticut Department of Social Services to perform administrative functions for the THRP known as the Connecticut Pre-Existing Condition Insurance Plan. n'-jsurance COVERAGES PAI is covered by crime insurance issued by Travelers Casualty and Surety Company of America. The fidelity coverages, including employee theft and employee theft of client property, has a $1 million limit ofthe liability per single loss. The insurance coverages for PAl exceed the suggested minimum limits of insurance pursuant to the Handbook. In addition to fidelity bond insurance, PAl carried insurance coverage for the following lines with the respective insurance companies: Hartford Casualty Insurance Company Hartford Insurance Company of the Midwest Business owners including umbrella Workers' compensation and employers' liability 5

10 Hartford Underwriters Insurance Company Philadelphia Indemnity Insurance Company Travelers Casualty and Surety Company of America Landmark American Insurance Company Commercial automobile liability and business automobile Private company protection plus (which includes directors and officers liability) Crime Professional Liability TERRITORY AND PLAN OF OPERATION The Association is authorized to write health insurance for Connecticut residents as specified in Section 38a-556 of the CGS. It had approximately 1,600 lives as of year end. The type of policyholders are mainly high risk individuals, individuals who have exhausted "COBRA", and lower income individuals who can receive insurance at reduced rates. Any licensed agent in Connecticut can submit an application to the Association. INFORMATION TECHNOLOGY AND CONTROLS The Association's Information Technology (IT) falls under the controls of PAL Maintenance of IT is performed by a combination of a sole IT employee and a contractor, ForeSite. ForeSite is primarily responsible for maintaining the IT infrastructure. A "high level" IT internal control review was conducted. The Information Technology Planning Questionnaire (ITPQ) was given to the Association for its response. An assessment of the responses to the ITPQ combined with a limited review of controls in the areas of logical and physical security, operations, and business continuity was performed. Due to the small size of the IT environment and the review performed by the Department, it was determined that reliance should not be placed on IT controls. In testing the account balances the IT assessment was considered. ACCOlJNTS AND RECORDS The Association utilizes Microsoft Dynamics (formerly Great Plains) for its general ledger and accounts payable reporting. The Advanced Health Administrative System (AHA) is used to process premium enrollment, billing, and collection. The Association contracts the services of UHC to maintain and manage its claim processing function. 6

11 FINANCIAL STATEMENTS The following statements reflect the admitted assets, liabilities and members' accountability, an statement of operations and changes in members' accountability as of December 31, 2011, as determined by the examination: ADMITTED ASSETS Cash and cash equivalents Premiums receivable Due from participating insurance carrier Administrative services fees and expenses Federal grants receivable $ 555,147 91,602 3,171,191 17, ,433 Totals $ 3, LIABILITIES AND MEMBERS' ACCOUNTABILITY Loss reserves Claims payable Line of credit Advance premiums Professional and other expenses payable Accrued administrative expenses Accrued assessment credit Accrued interest expense Due to participating insurance carriers Total liabilities MEMBERS' ACCOUNTABILITY Totals $ 3,404, ,878 1,600, , , ,479 2,367,637 24,172 3,171,191 12,438,009 (8,471,737) $ 3,966,272 7

12 STATEMENT OF OPERATIONS AND CHANGES IN MEMBERS' ACCOUNTABILITY PREMIUMS AND OTHER REVENUES Health premiums, net Administrative service fees HEALTH BENEFITS PAID OR PROVIDED INSURANCE EXPENSES AND OTHER DEDUCTIONS Administration expenses Premium and other taxes Amortization expense Professional and other expenses Loss from operation $19,242, ,830 19,390,282 26,742, , , , ,607 1,565,899 (8,917,752) OTHER EXPENSE Interest expense Net loss FEDERAL GRANT AWARDS MEMBERS' ASSESSMENTS (CREDITS) Current year Prior year Change in members' accountability -" 183, ,975 (9,101,727) 982,800 12,500,000 (1,605,216) 10,894,784 2,775,857 MEMBERS' ACCOUNTABILITY, beginning of year CHANGE IN NONADMITTED ASSETS MEMBERS' ACCOUNTABILITY, end of year (11,354,929) 107,335 ($8,471,737) 8

13 ANALYSIS OF EXAMINATION ADJUSTMENTS Surplus Adjustment Amount per Amount per Increase/ Account Company Examination (Decrease) Assets Premiums receivable $148,267 $91,602 ($56,665) Liabilities Professional and other expenses payable 95, ,494 69,810 Total Adjustment ($ ) PREMIUMS RECEIVABLE $ (Association $148,267) The Association was unable to produce a reasonable aging report of the captioned account and the Department could not quantify the year end balances without auditing the entire population on a policy by policy basis. Statement of SAP (SSAP) No.6 of the NAIC Accounting Practices and Procedures Manual (Manual) states in part that "any uncollected premium balances which are over ninety days due shall be nonadmitted". It is recommended that the Association implement procedures to properly age the premium receivables in order to report accurate premium balances in accordance with SSAP No.6 of the Manual. For 2011, $56,665 should be nonadmitted. PROFESSIONAL AND OTHE EXPENSES PAYABLE $165,494 (Association $95,684) The Association did not accrue for the Connecticut Insurance Department's 2011 incurred assessment due on March 31, 2012, or the Health and Welfare assessment due on February 15, SSAP No.5, paragraph 2 of the Manual states that "a liability is defined as certain or probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or to provide services to other entities in the future as a result of a past transaction or event". It further states in paragraph 3 that a "liability shall be recorded on a reporting entity's financial statement when incurred". It is recommended that the Association report due and unpaid assessments in accordance with SSAP No.5 of the Manual. For 2011, the captioned account should be increased by $69,810. 9

14 LOSS RESERVES AND CLAIMS PAYABLE $ The following items were included in the captioned accounts: Loss Reserves $3,404,517 Claims Payables 788,878 $4, The Association engaged Milliman to develop recommended IBNR reserves as of December 31, In performing its calculations, Milliman relied on paid claim triangles prepared by UHC for PPO and SHCP. For each category of business, Milliman utilized monthly paid claim data with paid and incurred dates from April 2009 through March Milliman provided a recommended reserve for each plan, the sum of which totaled the IBNR amount of $3,250,017 reported by the Association. The IBNR reserve includes a 5% margin over the "best estimate" to provide greater likelihood that it will be adequate. This is the same margin that Milliman has been using the past several years. Actuarial standards of practice for reserves for healthcare benefits call for the inclusion of a liability to cover expenses relating to settling the claims covered by the reserves. Further, Interpretation of the Manual states that "liability for unpaid LAE should be established regardless of any payments made to third party administrators, management companies, or other entities." The $3,250,017, loss reserve did not specifically reflect this liability and therefore the Association reported an additional liability for loss adjustment expenses (LAE) of $154,500, representing the midpoint of the range recommended by Milliman. The $788,878 of claims payable represented the amount due to UHC as reimbursement for claims paid prior to December 31, 2011 by UHC on the Association's behalf, which were included in the claim triangles but not yet booked to the Association's general ledger as of the valuation date. The Department conducted an actuarial analysis of the recommended IBNR reserves. In evaluating IBNR reserves the Department relied upon the following documents provided by the Association and Milliman: Reserve estimate as of December 31, 2011, prepared by Milliman and communicated to the Association in a letter dated May 30, Statutory basis financial statements as of December 31, 2011, prepared by GT. Workpapers prepared by Milliman supporting its IBNR reserve calculations. The review by the Department consisted of verifying that Milliman is: Following standard actuarial practices and methodologies in its use of claim triangles. Evaluating its preliminary calculations for reasonableness and consistency with prior periods and internal consistency among products and distribution channels. ]0

15 Properly monitoring the runout ofprior period reserve levels as an additional check on the validity of expected claim patterns derived from the claim triangles. The Department concluded that the recommended IBNR reserve, the LAE reserve, and the claims payable liability were reasonable. MEMBERS' ACCOUNTABILITY ($ ) The Association carries no surplus, but rather members' accountability, which represents the members' deficiency at year-end. As the Association was created as a high risk pool designed to have loss ratios well over 100%, it is expected that the Association will be in a net loss position each year. PAGE 4 MANAGEMENT AND CONTROL RECOMMENDATIONS It is recommended that the Association comply with Article VII A (1) ofthe Plan and increase its Board membership to nine. 9 PREMIUMS RECEIVABLES It is recommended that the Association implement procedures to properly age the premium receivables in order to report accurate premium balances in accordance with SSAP No.6 of the Manual. For 2011, $56,665 should be nonadmitted. 9 PROFES SIONAL AND OTHE EXPENSES PAYABLE It is recommended that the Association report due and unpaid assessments in accordance with SSAP No.5 of the Manual. For 2011, the captioned account should be increased by $69,810. CONCLUSION The results of this examination disclosed that as of December 31, 2011, the Association had admitted assets of$3,966,272, liabilities of$12,438,009, and members' accountability of ($8,471,737). During the period under examination, admitted assets increased $1,980,890, liabilities increased $2,824,413, and members' accountability decreased $843,523. It was determined that the Association's assets and liabilities were fairly stated in accordance with guidance outlined in the Manual. 11

16 SIGNATURE In addition to the undersigned, William Arfanis, CFE, James Jakielo, FSA, MAAA, Grace Jiang, CFE, and Cecilia Arnold, APE, of the Connecticut Insurance Department participated in this examination. I, Wayne Shepherd, CFE, do solemnly swear that the foregoing report of examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as of December 31, 2011, to the best of my information, knowledge and belief. Respectfully submitted, WaynlShepherd, CFE Examiner-In Charge State of Connecticut Insurance Department State of Connecticut ss County of Hartford Subscribed and sworn before me, PCC+I-~ c (c-:.;. pu +-( f~notary Public, on this I!,.H" ~r;: day of U('C f"'", LO 12. PULLeA:.JJ6 6/u k Notary Public of the Superior Court My Commission Expires S-r0 if (,,, L CO'r 30. ;;) (/ I.3. I 12