Medical Stop Loss Rates Will Increase Because of Katrina

Source: Ernie Clevenger, MyHealthGuide, www.MyHealthGuide.com Most stop loss carriers reinsure a significant portion, and in many cases, the majority of their stop loss medical risk to reinsurers. Generally, these reinsurers are property and casualty (P&C) reinsurers as opposed to life and health reinsurers. Many of these P&C reinsurers have significant risk positions behind primary insurance carriers that have Katrina losses. P&C reinsurers will have to soon increase rates, recapitalize, insist on tighter terms or reduce risk positions. As the P&C reinsurance market hardens, medical stop loss rates will likely increase on new and renewal business as early as January 1. Katrina losses are unprecedented In a report published on 8/14/05, Moody's Investors Service says that reinsurers are likely to absorb a larger share of total insured losses from Hurricane Katrina than from other hurricanes. "We expect that most large reinsurers have managed their Gulf Coast exposures prudently, enabling them to absorb losses from Katrina and sustain their ratings," says Bruce Ballentine, a Moody's insurance analyst and co-author of the report, entitled "Reinsurers Face Large Losses from Hurricane Katrina; Downgrades Possible." Hurricane Katrina will most likely be the largest property loss ever recorded in the global property reinsurance market. Reinsurers with outsized exposure to the affected region, or to hard-hit industries such as energy or gaming, could face rating downgrades, particularly if they do not recapitalize quickly. "The devastation wrought by Hurricane Katrina will almost certainly cause an unprecedented level of losses for the insurance industry. The challenge of estimating losses is compounded for reinsurers," says Ballentine, "because they are generally a step removed from the underlying risks." Reinsurers provide bulk coverage to primary insurers on a range of underlying policies and exposures. Following a catastrophe, primary insurers adjust and settle claims on the underlying policies, and then submit aggregate claims to their reinsurers. As a result, reinsurers have limited information on the underlying losses and they receive that information on a lagged basis. 13 Insurers on Review for Possible Downgrade by A.M. Best On 9/15/05, A.M. Best placed 13 companies on review for possible downgrade, citing potentially large losses resulting from Hurricane Katrina. A.M. Best also downgraded Olympus Re, and extended its negative review of four other firms, including Munich Re and American Re, to include the effects of Katrina. "A.M. Best expects all rated companies will be able to meet their current loss obligations," the company said in a statement, but it said the disaster leaves "potential capital shortfalls" at some firms and calls into question their risk management capabilities. Reinsurers Will Price To Experience AON released a statement on 9/12/05, "Hurricane Katrina will most likely be the largest property loss ever recorded in the global property reinsurance market. Reinsurance programs in place will transfer significant volatility and replace critical capital for insurers. Bryon Ehrhart, head of Aon Re Global Services stated, "We believe the reinsurance market should remain a technically priced market and ... should differentiate individual client exposures and experience from the general market trend." Hannover Re Keeps Katrina Estimate for Now The world's fourth-largest reinsurer, Hanover Re, said on 9/12 it may have to revise its earnings forecast down further if its share of claims from Hurricane Katrina increase, but said it saw no need at the moment to do so. Nevertheless, the larger Swiss rival Swiss Re warned it would miss its profit target this year as it increased its estimate of its share of the Katrina loss to $1.2 billion, on the basis of a total insured loss of $40 billion. HCC Estimates Katrina's Loss HCC Insurance Holdings, Inc., parent of HCC Life, a national provider of medical stop loss, said on 9/14 that anticipated claims from Hurricane Katrina are expected to result in the Company's largest gross loss in its history, estimated at $160 million arising from aviation, onshore and offshore energy, property, marine and other specialty lines of business. This loss is estimated to be $50 million net of reinsurance including reinsurance reinstatement costs, $32.5 million after tax, and will reduce third quarter earnings of the Company by approximately $0.30 per diluted share. Stephen L. Way, Chairman and Chief Executive Officer, said, "Our exposure is predominantly to energy and large commercial property accounts and is substantially protected by catastrophe reinsurance." Mr. Way added, "From an industry standpoint, premium rates will need to rise significantly in these lines of business to reflect both the increased frequency and severity of catastrophic events that have occurred over the past five years." Final Tally on Reinsurance Impact Delayed Tim Carroll, newly appointed European non-life business leader of GE Insurance Solutions, says the main reason for reinsurers' delay in releasing loss estimates is that they depend heavily on cedants for detailed information about the risks they write. "As a reinsurer you are one step removed," he says. "In theory insurers should have the most knowledge. But some track risks by post code and some don't. A retro provider is relying on a reinsurer which has written cover from a whole bunch of clients, so that is one step removed again." Conclusion Reinsurers must manage their portfolios based on overall liability obligations and available capital resources. The medical stop loss reinsurance component is small when compared to the overall property and casualty market. Because of its relatively small position, medical stop loss rates can be swept up in the momentum of greater movements caused by Katrina. The stop loss reinsurance market is entering the negotiation season. At the upcoming SIIA National Conference & Expo, the lobbies, hallways and suites will be packed with MGUs, carriers and reinsurers renewing and writing new programs. It's the U.S. stop loss reinsurance version of Monte Carlo's Rendez-Vous. It's yet to be seen the full impact of Katrina. But my guess is: Stop Loss rates for January 1 business will be increased more so than in past years ... and there will be less rate discounting.