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1 1 (August 18, 2017)

handle is hein.crs/govcfzv0001 and id is 1 raw text is: FF.~*\* August 18, 2017 Reinsurance in Health Insurance Reinsurance, also known as insurance for insurers, is a mechanism aimed at reducing an insurer's financial liability associated with unexpectedly high health care costs. The availability of reinsurance may be one of many factors an insurer considers in assessing potential exposure to loss in a certain market. This may affect whether or not to enter a market, what types of products to offer, and how premiums are set. Reinsurance may be structured and funded in a variety of ways. The potential impact of reinsurance on health insurance premiums is highly dependent on the amount of funds available for reinsurance as well as whether the program is funded internally or externally. The concept underlying insurance is risk (i.e., the likelihood and magnitude of financial loss). In any type of insurance arrangement, all parties seek to manage their risk, subject to certain objectives (e.g., coverage and/or profit goals). In health insurance, consumers (patients as insurance beneficiaries) and insurers (as providers or sellers of insurance) approach the management of insurance risk differently. From the consumer's point of view, a person (or family) buys health insurance to protect against financial losses resulting from the unpredictable use of potentially high-cost medical care. The insurer employs a variety of methods to manage the risk it takes on when providing health coverage to consumers, to assure that the insurer operates a viable business (e.g., balancing premiums against the collective risk of the covered population). The insurer uses these methods when pooling risk so that premiums collected from all enrollees generally are sufficient to fund claims (plus administrative expenses and profits). Sometimes, however, even with the variety of methods an insurer may employ to manage risk, the risk taken on by the insurer may not be sufficient to protect against the chosen risk management strategies. For example, a single health insurance company may be unable to cover a catastrophic loss. To limit their risk exposure, insurers often transfer some of their liability or risk to another insurer, a reinsurance company. That is, just as an insurer pools the risk of its covered consumers, a portion of that risk gets further spread to other insurance companies, known as reinsurers. Reinsurance, thus, is an extension of insurance and further acts as a risk transfer and risk spreading mechanism. Reinsurance works by spreading the costs associated with high-cost incidents across insurers. Insurers often purchase reinsurance for four reasons: 1. To limit liability on specific risks. That is, reinsurance allows insurers to offer coverage limits higher than they otherwise might. This is particularly useful for smaller insurers (where risk is spread among fewer enrollees), allowing them to compete with larger insurers. 2. To stabilize loss experience. A unique feature of insurance is that actual costs associated with enrollees is not known until sometime in the future. Reinsurance stabilizes fluctuations in an insurer's loss experience, particularly those associated with high-cost enrollees. 3. To protect against catastrophes. An insurer may experience a catastrophic loss due to a one-time event (e.g., expenditures associated with a natural disaster). Through reinsurance, insurers can reduce any fluctuations in their loss experience. 4. To increase capacity. That is, reinsurance allows an insurer to assume a larger overall capacity of risk than it may otherwise be able to. .-,ranb(&, A ', r.,,8 and, btSC ar-ekn Reinsurance may be structured in a variety of ways depending on the insurer's need and can range from simple to complex. Generally, however, a reinsurance contract either may be a broad agreement covering some portion of the business or may cover a specific risk. Reinsurance may also be funded using a variety of methods. Reinsurance can be funded by internal resources; this may include insurers assessing a surcharge on premiums or insurers voluntarily purchasing reinsurance from a reinsurance company. Reinsurance can also be externally funded; this may include the government appropriating funds for reinsurance. Reinsurance can also be funded through a combination of internal and external funding. An example of this combination mechanism may include all insurers being assessed a reinsurance charge, but only certain insurers being eligible for reinsurance payments. The reinsurance arrangement typically involves various payment parameters. Generally, in order for a health insurer to receive a reinsurance payment, an enrollee's total claims costs must exceed a specified level (referred to as the attachment point; see Figure 1). The insurer is then paid a portion of the claims costs (referred to as the coinsurance rate) beyond the attachment point until total claims costs reach a cap (referred to as the reinsurance cap; see Figure 1). .O 'T p\w -- , gnom goo mppm qq\ M , q 'M I 11LULANJILiM,

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