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Mar 2000 Issue 003

             Hardening stop-loss market has employers                         re-evaluating relationships 

By: Craig Gunsauley

Self-insured employers are experiencing a second consecutive year of sticker shock for stop-loss insurance coverage as the industry continues hardening and insurance carriers institute tough new underwriting standards.

Experts say premiums are increasing an average of 30% to 50% this year, although some employers are seeing premiums surge 100%. In other cases, plan sponsors are finding their existing carriers are unwilling to renew coverage, forcing them to shop around for coverage in a tough marketplace. The outlook for next year: more premium increases of similar magnitude, as health care inflation continues to leverage the risks in self-funded health plans.

“Employers are alarmed at the cost increases,” comments Tim King, vice president at Aon Consulting in Columbus, Ohio. “A lot more employers are looking for new stop-loss carriers. They’re also looking at their deductibles and attachment points to better adjust their risk and align their stop-loss coverage better.”

“It really pays to shop around. However, it doesn’t always pay to switch carriers for a small difference in premium,” he adds.

“Employers need to be looking for coverage sooner than they used to, and they should know that the underwriting requirements are much stricter,” observes Liz Mariner, vice president and principal at Towers Perrin in Stamford, Conn.

Employers should be partnering with their third-party administrators (TPAs) and benefits brokers over the long-term for important plan services such as risk analysis, benefits design consulting, stop-loss coverage and large-case claims management, Mariner says. These relationships should be based on good service and financial stability, rather than on price alone.

Most TPAs have long-term relationships with managing general underwriters (MGUs), who analyze risk and underwrite coverage with the backing of stop-loss insurers and re-insurance companies.

“Many employers aren’t willing to absorb the significant premium increases without marketing it and testing to see if it’s competitive,” Aon’s King says. “In many cases it is competitive. A lot of employers shop just the stop-loss coverage to test the premiums offered by the existing carrier. However, all things being equal, there is value in maintaining existing relationships if service is good.”

Bad business

Problems in the stop-loss market began in the mid-1990s when new players, primarily life and health insurers, saw opportunities to build up books of business in the market. As these players entered the market, competition increased to the point where MGUs started getting compensated based only on premium volume, rather than on risk or profitability. As a result, stop-loss premiums remained flat and even declined for some employers for about three years, even as risks continued to increase.

“Between ’96 and ’98, it was an extremely soft market,” Mariner explains. “There were a lot of rogue underwriters out there writing business without any regard to profitability. It was like a feeding frenzy.”

Because of the soft market, aggregate losses began piling up for stop-loss insurers in 1998, and these losses continue today. While these losses are pooled with gains and therefore never reported publicly, experts estimate that insurers lost hundreds of millions of dollars on stop-loss claims due to poor underwriting.

Many of these insurers and MGUs have been forced out of the industry in the last two years as the market hardened again and rates began surging upwards. Last year, premium increases averaged 30% for most employers, but some saw premiums go up 60% to 80% or even double.

“From the employers’ perspective, they enjoyed some very good deals in terms of the value they got and the price they paid for stop-loss coverage,” says Mariner. “Unfortunately, good deals don’t last forever.”

For the past year or more, stop-loss carriers have been instituting tough underwriting standards and auditing their MGUs more frequently. They are also refusing to offer coverage to groups with bad claims experience or only offering coverage at very high premiums. TPAs and MGUs are taking harder looks at deductible levels for aggregate stop-loss coverage and attachment points for specific claims coverage.

Aon’s King predicts some trouble in the industry as desperate underwriters try to stem the losses of the carriers who underwrote their unprofitable business. King has heard reports from some employers that insurance carriers are denying claims unfairly.

“It’s the toughest market we’ve ever seen,” King says. “As insurers try to return to profitability for stop-loss, some carriers are beginning to deny claims that before they would automatically pay.”

“A lot of them are looking for minor reasons to deny substantial claims. It’s really becoming a concern for us. It shows the desperation of the stop-loss carriers and MGUs out there to return to profitability. It’s shortsighted and, in some cases, unethical. It could give the industry a black eye.”

A new game

“Because of the underwriting losses of the last several years, the concept of pooling risk has been largely forgotten,” says Dave Kelley, vice president at Cairnstone, a Miami-based managing general underwriter. “We’re seeing 100% increases for some of the accounts that have been poorly handled by underwriters in the past.”

Employers with bad claims experiences generally are experiencing the largest increase in rates and often find they can’t get better rates by shopping around. Well-handled accounts, on the other hand, are coveted by the players left in the business and often see increases in the 10% to 25% range. However, even some employers with good claims experience are experiencing rate increases of 40% to 60% as the market aligns itself, Kelley comments.

Most stop-loss insurance is a combination of specific claim coverage with a set deductible and aggregate coverage that insures against the total of all health claims. In standard stop-loss policies, aggregate coverage takes effect if claims costs exceed 125% of actuarial expectations. In general, there is little variation in the cost of aggregate stop-loss insurance premiums. “If you’re getting an increase of less than 18% on specific claim coverage, then you’re below trend. Someone thinks you’re a good risk,” Kelley says. “Mostly, we’re seeing increases in the 20% to 30% range, depending on claims history.”

Many employers view stop-loss coverage as a commodity and seem willing to shop around every year for the lowest rate. “I don’t buy into that view,” Kelley comments. “We at Cairnstone believe we’re in relationships with our TPAs and brokers. We’re decentralized, so the underwriting occurs in the field.”

“When big claims come in, we work with our partners to provide the proper coverage. We don’t view claims as an expense or an opportunity to re-write coverage at higher rates.”

There is significant cost containment potential in any large stop-loss claim. The sooner the employer notifies its TPA and the MGU of the claim, the more likely it can be resolved at a reasonable price through claims management and the services of transplant networks or tertiary care networks, according to Kelley.

“Big claims can easily cost $500,000. With the proper notice and claims management, that can be reduced to $200,000 with high-quality treatments and outcomes,” Kelley explains.

The upheaval in the stop-loss market is putting new emphasis on employers working relationships with TPAs and brokers and drawing new attention to plan design issues that affect risk levels, observes Jim Kinder, CEO of the Santa Anna, Calif.-based Self Insurance Institute of America (SIIA).

“I see more work being done in the design of plans to fit the needs of the workforce and put more responsibility back on individuals for their own health,” Kinder states. “That doesn’t mean they’re taking away benefits, but they are re-designing benefits. Plan design is playing a bigger role in today’s marketplace. Not so much as a cost reduction factor but rather as a long-range cost containment strategy.”

The hardening of the stop-loss market should be viewed as good news for employers, because rates will stabilize as they more accurately reflect risk, says Don Gasparro, president of NIIA/Apex, a stop-loss industry consultant in Princeton, N.J.

“The cost of risk doesn’t change,” Gasparro says. “You’re a risk, no matter what you are or what your experience has been. But as more re-insurers enter the business, the margins should be reduced and prices will stabilize.”

While Gasparro and others predict the market will stabilize next year and could even soften again in 2003, the nature of health plan risk is unpredictable.