Several trends are coming together in the health-care insurance industry that could result in significant, unexpected exposure and losses for health plans, and potentially higher health insurance premiums for employers.
This risk comes in the form of multiple claims arising from a single incident. While each claim may not exceed a health plan's retention level for reinsurance, the combined claims could easily go over this retention, yet still not be eligible for reinsurance. That's because excess reinsurance programs are designed to protect the health plan in case an individual claim exceeds a predetermined retention or deductible.
While this is a fundamental and important risk management tool that gives the plan some cost certainty, the coverage does not address multiple, subretention claims from a single event such as an automobile accident or an insured having triplets.
Let's say a health plan decides that the maximum exposure it wants on any one claim is $1 million. It purchases excess reinsurance accordingly to help in case an insured needs an organ transplant or has a complicated birth or pregnancy.
But what if an insured employee and her family of four are in a car accident, incurring an average of $600,000 of medical expenses for each person? The plan now has $2.4 million of liability with little, or possibly no, reinsurance. Natural disasters such as Hurricane Katrina and accidents such as the nightclub fire in Rhode Island that occurred a couple of years ago pose similar threats, especially in smaller communities where a health plan might be the largest single payer.
Fortunately, this has not been a common occurrence for most health plans and their employer groups, but that may be changing. For one thing, advances in technology plus rising costs are pushing even some routine claims closer to the retention level. A far more likely scenario, however, is the possibility of having a multiple birth claim where, overnight--literally--one insured turns into four.
Because of this, some health plans are starting to look at ways to supplement their excess reinsurance coverage with multiple-loss coverage to lessen the impact of several individual claims arising from a single event. Such multiple-loss programs are designed to offer significant coverage in a cost-effective manner. An important element of this type of coverage is how an event is defined. The most common definition allows the event to:
- occur in a period of seven days (this would include an earthquake and aftershocks)
- occur within a 50-mile radius
- not be a result of terrorism
Once an event occurs as defined above, the insured has two years from the date of the event to incur claims allowed under this coverage.
Typically, this coverage will also stipulate a deductible of a minimum number of lives (called a life warranty). The life warranty is frequently three lives, allowing coverage if three or more people are affected by an event. In addition to a life warranty, this type of reinsurance program also has a dollar-amount retention or deductible the client must absorb before reinsurance is payable.
Another coverage parameter is the minimum and maximum allowable claims per person paid by the carrier. The minimum allowable per person is usually $10,000, which keeps the cost of coverage down by preventing a high volume of noncatastrophic claims.
The maximum allowable claims limit per person paid by the carrier can be set to match the retention level at which a traditional excess medical treaty is purchased. If a client has a deductible of $500,000 as the maximum allowable per person on the traditional excess reinsurance, it would be common to also have $500,000 as the maximum allowable per person on this coverage. This approach, in effect, prevents duplicate coverage and premium payment on claims generated by one individual covered under both reinsurance products.
The maximum benefit for this type of coverage varies but a normal limit is $10 million. Here's an example of how this coverage works:
Responsible Insurance Company buys a multiple-loss reinsurance agreement with the following provisions:
- The agreement year is Jan. 1, 2005, to Dec. 31, 2005
- $1 million deductible (or retention)
- Three-life warranty
- $10,000 minimum any one life
- $500,000 maximum any one life
- $10 million maximum benefit
Responsible learns five of its insureds are involved in a single car accident on May 1, 2005. The following claims resulted from the injuries, and the treatment occurred during the two-year period from May 1, 2005, to April 30, 2007.
Insured A: $800,000
Insured B: $300,000
Insured C: $400,000
Insured D: $500,000
Insured E: $9,000
This accident meets the definition of an eligible event because it happened within the 12-month period of the agreement year, the claims were incurred within two years of the accident, and more than three people were affected, meeting the three-life warranty requirement.
So what is payable? Allowed amounts are:
Insured A: $500,000 (the maximum of $500,000 any one life applies)
Insured B: $300,000
Insured C: $400,000
Insured D: $500,000
Insured E: $0 (the minimum of $10,000 any one life applies)
Total allowed amount: $1.7 million
Less the deductible: $1 million
Reinsurance recovery: $700,000
The cost of this additional coverage may vary, but it should be cost-effective in relation to the exposure. It can be very valuable in the rare, but increasingly more common, natural disaster, accident or multiple birth. If we learned anything in recent years, it is that for insurers, the impossible can happen!
MICHELLE FALLAHI is vice president, medical and managed care reinsurance for ING Re, the reinsurance business of ReliaStar Life Insurance Co.
October 1, 2005
Copyright 2005© LRP Publications