A.M. Best Special Report: Medical Stop-Loss Market May Show Signs of Hardening in 2007

OLDWICK, N.J.--(BUSINESS WIRE)--The medical stop-loss insurance market, estimated at $4.0 billion in annual premiums, historically has been cyclical, with noticeable fluctuations in premiums written and profitability. Recent history illustrates these market dynamics, according to a special report by A.M. Best Co.

The “soft” medical stop-loss insurance market of 1998-1999 witnessed most stop-loss carriers incurring significant underwriting losses. These losses were due to a number of different factors. Some companies offered substantial discounts during this period to prospective customers in order to obtain business.

Other carriers maintained attachment points on aggregate stop-loss coverage that were not high enough, while some writers incurred material claims on specific stop-loss coverage. Additionally, there was an evolving managed care environment where insurers did not know what to expect from processing medical claims through providers. As a result of these underwriting losses in the late 1990s, many carriers decided to exit the stop-loss market.

Shortly thereafter, those remaining stop-loss carriers took action to correct the factors that caused the deficits. Premium rates were increased significantly, discounts offered were reduced and attachment points were raised on aggregate stop-loss coverage. These corrective actions from earlier pricing missteps enabled most stop-loss writers to rebound and realize favorable profitability levels from 2001 to 2003.

This new “hard” market, however, did not last, as stop-loss profit margins began to contract again in 2004 and 2005. Most stop-loss carriers reported increased loss ratios and, therefore, generally more modest profit margins. Higher loss ratios were partially due to deviations by some agents and managing general underwriters (MGUs) from carriers' underwriting policies; an unexpected level of elevated inpatient hospital expenses and an overall increase in severity of specific stop-loss claims.

More important, profit margins have been pressured recently by large, managed care carriers and some not-for-profit Blue Cross Blue Shield plans in the fully insured health market that offered substantial discounts to prospective customers. Managed care carriers in the fully insured market periodically venture into the medical stop-loss market. These factors resulted in more competition for stop-loss writers.

The dynamics of the stop-loss market have undergone considerable changes over the past decade. There are, approximately, fewer than 50 MGUs currently writing stop-loss business. This number was estimated to be more than 300 just 10 years ago. Today, only a few of the leading carriers focus on stop-loss coverages as a core business, while the smaller carriers view it as an ancillary product offering.

Additionally, most reinsurers, once very active in the stop-loss market—particularly through relationships with MGUs—have exited the market, as ceding commission expense increasingly has accounted for too large a percentage of the expected profit. Reinsurance had been a key component of a number of companies' presence in the stop-loss market.

When the stop-loss market softened in the mid-2000s, some carriers experienced a noticeable uptick in their loss ratios, while other carriers experienced more modest overall increases. A.M. Best notes that those carriers that experienced larger increases in their loss ratios generally were those whose underwriting was controlled by outside MGUs. A softer market can prompt some MGUs to deviate from underwriting policies to attract new business. However, it is important to note that this behavior was more evident in earlier underwriting cycles.

BestWeek subscribers can download a PDF copy of all full special reports at no additional cost or a combination of the PDF copies plus all related spreadsheet files of the report data at no additional cost from our Web site at www.bestweek.com.

Nonsubscribers can download a PDF copy of the full special report (4 pages) for $30 from our Web site at www.bestweek.com. Call customer service for more information, (908) 439-2200, ext. 5742.

A.M. Best Co., established in 1899, is the world’s oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best’s Web site at www.ambest.com.

Contacts
A.M. Best Co.
Analysts:
Brian Virostek, 908-439-2200, ext. 5531
brian.virostek@ambest.com
Carl Austin, 908-439-2200, ext. 5500
carl.austin@ambest.com

or

Public Relations:
Jim Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com