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In these pandemic times, the usual challenges for health plans, including the rising cost of care, an aging population, brisk competition, and new medical technology have been compounded by dramatic workforce changes, sophisticated cyber attacks, membership retention, and the threat of large costs from emerging cell and gene therapies. Any combination of the above underscores the need for plans to have a flexible capital strategy able to meet both challenges and opportunities.
Capital Motivated Reinsurance’ allows a health plan to diversify its mix of capital financing while also improving its RBC (Risk Based Capital) ratio. Capital Motivated Reinsurance has been a common source of capital financing for Life and Property & Casualty insurance companies but has historically been underutilized in the Accident & Health space. It is cost competitive with other capital financing sources, generally easier to put into place, and provides greater flexibility to adjust or cancel. It does not require giving up equity, as with an investor, or repayment of a loan. Variations of the structure can be used for plans that want to use a captive insurance company.
How does Structured Reinsurance work?
A basic Capital Motivated Reinsurance program is very straightforward: a health plan cedes a quota share percent of premium and claims to a reinsurer, which has the effect of removing this share of premium and claims from its RBC calculations. An experience refund provision returns the profit to the plan, less a reinsurer risk charge and a loss carryforward provision allows the reinsurer to recover losses from future profits.
Structured Reinsurance Summary
Flexibility – A particular strength of Capital Motivated Reinsurance is the plan’s ability to increase the ceded premium level during the contract year to meet unexpected needs (provided the reinsured business is performing as expected). Similarly, if it is determined that the program is no longer needed, it can be canceled, or the amount of premium ceded under the agreement can be reduced. This compares very favorably with the encumbrances of other capital financing sources such as loans requiring repayment over multiple years.
Projected Impact / Objective Setting – The Capital Motivated Reinsurance process begins by understanding the health plan’s program objectives. For example, using a Capital Motivated Reinsurance program, capital allocated by a plan to their Medicaid business could be reduced and redeployed to a new Medicare line of business all while maintaining the same RBC ratio. Various projections can then be made of the effect different ceded amounts will have on the plan’s RBC ratio and the resulting capital required to maintain their target RBC ratio.
Reinsurer Appetite – There is strong reinsurer interest in writing these programs, particularly when attached to a historically stable line of business. “These reinsurance programs can really be used across any health product and be of value to a health plan that is looking to be more capital efficient,” explains Dave Rowbottom, VP Structured Reinsurance Solutions at Canada Life Reinsurance.
Implementation Planning – Like any material reinsurance program, putting Capital Motivated Reinsurance in place does involve stakeholders from multiple areas, including actuarial, legal, the plan’s auditor, and the state insurance department. For this reason, we recommend starting discussions with reinsurers three to six months in advance of the need.
Risk Transfer – For a plan to earn statutory credit, a Capital Motivated Reinsurance program must meet the same risk transfer requirements as any other reinsurance. Prescribed regulations for risk transfer for life and health reinsurance are found under the Life and Health Reinsurance Agreements Model Regulation, Appendix A791 to SSAP 61 in the NAIC Accounting Practices and Procedures Manual. Confirming the reinsurance satisfies these risk transfer requirements is a critical part of the process for all parties.
Health plans have a range of capital management options from debt instruments, private investment/venture capital, surplus notes, and traditional quota share reinsurance. Capital Motivated Reinsurance offers compelling reasons, including flexibility of size and duration, to include it as part of a plan’s capital strategy. Plans have, for instance, begun to put a “starter” program in place at an initial low quota share to introduce reinsurance as part of their capital strategy and increase its use as they learn the benefits and potential applications.
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