SPOTLIGHT ON MARYLAND:

Health Insurance Premiums,

the Underwriting Cycle and Carrier Surpluses

Deborah CholletSenior Fellow, Mathematica Policy Research

Maryland Health Care Commission January 27, 2005

Overview

The net cost of insurance and the

underwriting cycle

Trends in Maryland

– Underwriting gains and administrative

costs

– Insurer surplus or unobligated funds

Implications for premiums and the market

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The Net Cost of Insurance

Net cost of insurance

= premiums minus medical benefits

Nationally, the net cost of insurance has

grown as a percent of premiums …

While aggregate premium growth slowed due

to coverage loss and benefit redesign

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Nationally, the net cost of insurance is

nearly 14 percent of premium

11.9%12.8% 13.6%

9.6%10.6%

9.3%

0%

5%

10%

15%

20%

2001 2002 2003

Net cost perpremium dollar

Premiumgrowth

Source: CMS Office of the Actuary, National Health Statistics Group (2005).

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The Underwriting Cycle

Net cost – administrative cost = underwriting gain

Historically, underwriting gains have moved in cycles lasting about 6 years

Since 1990, underwriting cycles have been longer and more shallow, probably reflecting

– Competition with managed care and effort to deter entry

– Growing market concentration

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Trends in Maryland

Administrative costs have declined as a percent of premium

But underwriting gains have risen faster

On net, employers and consumers have seen the net cost of insurance rise as a percent of premiums

6

Underwriting Gain & Administrative Cost as a

Percent of Premiums: Group Coverage in Maryland

7%6% 6%

4%

12%

15%16%

19%

21%22%

0%

10%

20%

30%

1999 2000 2001 2002 2003

Average

underw riting gain

Administrative cost

trend

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Insurer Surplus

Underwriting gains not spent in the current

year accumulate as insurer surplus

Measured using NAIC accounting

conventions, surplus accounts for most or all

of an insurer’s ―total authorized risk-based

capital‖ or TAC

Insurers must hold TAC of at least 200% of

―authorized control-level‖ risk-based capital,

or ACL (BCBS = 375%)

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Total Authorized Risk-Based Capital in

Maryland Relative to Regulatory Levels

$0.8 $0.7

$1.1

$1.3

$1.7457%

378%

467%

508%

654%

$0.0

$0.6

$1.2

$1.8

$2.4

$3.0

1999 2000 2001 2002 2003

0%

200%

400%

600%

800%

Total

authorized

capital (TAC)

in $billions

TAC per

authorized

control level

risk-based

capital

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Implications for Premiums

Downturn of the underwriting cycle and lower administrative costs may finally offer Maryland employers premium relief

With shallower and longer cycles, insurers could hold lower surplus throughout the cycle

But insurers cite other reasons for maintaining high surplus—e.g., a potential terrorist attack

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Implications for the Market

In general, regulators have a bias toward greater surplus

But in a concentrated market, it may have unintended consequences:

– Deter new market entry

– Raise consumer prices, but not improve market stability

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