Guest Article

Shrinking Market, Rising Health Care Costs Contributing to Stop-Loss Premium Increases, Experts Say

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Summary: Stop-loss insurance premium increases are attributable to a decline in the number of stop-loss insurers and an increase in the cost of providing health care.

(May 7, 2001) - A decline in the number of stop-loss insurance carriers and an increase in health care costs are the two most significant factors contributing to rising stop-loss insurance rates, according to experts within the stop-loss insurance industry. These rates will continue to climb over the next couple of years as the stop-loss insurance market undergoes a metamorphosis in order to return to profitability.

Under stop-loss insurance, self-insured group health plans are protected from catastrophic losses by limiting their liability for medical expenses to a certain amount. Plans pay up to a certain level (usually between $10,000 and $25,000 per individual), and a stop-loss carrier will pay whatever costs exceed that limit, also known as an "attachment point."

A recent report by Miami-based Cairnstone Re estimated that stop-loss insurance rates would climb by as much as 30 percent in 2001. The report attributed the rate increase to decreased competition within the stop-loss insurance market because carriers are either going out of business or consolidating.

However, while the Cairnstone report estimated a 30-percent rate increase, Betty Sisti, vice president of underwriting for Connecticut-based Safeco Re, said that she's noticed that stop-loss premiums have increased approximately 45 percent, adding that they are returning to normal after years of stop-loss carriers having to underprice their rates to remain competitive.

"The pricing of risk is back to the level of profitability," she said. "This was bound to happen. There was too much capacity and too many players. And the more players you have, the more people you have trying to get a piece of the pie by reducing prices."

Sisti said most carriers like to compete in markets that have approximately five to six carriers, which makes it easier to gain a share of the market. However, until recently most markets had more than 20 carriers, which forced carriers to dramatically reduce their rates to compete successfully. Making matters worse was the rising costs of health care, which made claims more expensive.

"The underpricing occurred for too many years, and the losses were greater than most people expected," she said. "And with medical care costs increasing -- particularly prescription drug costs -- most [stop-loss insurance] carriers were not producing the profits that they expected, so they moved away" from providing stop-loss insurance.

Mike Ludt, vice president of marketing for Irvine Calif.-based Stop-Loss Insurance Brokers Inc., said lowering premiums was a way that stop-loss insurers remained viable within their markets.

"When stop-loss insurance was big, claims reporting was new and unsophisticated, and it was a crapshoot for carriers to get involved in the market," he said. "Then claims blew up, which caused carriers to go bankrupt or get out of the stop-loss insurance market. Now that the market is smaller, everyone is playing it safe by raising their premiums."

The Cairnstone report noted that the changes in the stop-loss market will affect the way that insurance underwriters, third-party administrators (TPAs) and insurance brokers conduct business, adding that stability will be the industry's main focus.

"We believe that TPAs and insurance brokers will begin looking at the underwriting and medical management capabilities of stop-loss reinsurance providers as well as their financial strength, responsiveness and services, rather than price, when arranging coverage for their self-funded clients," said David Kelley, Cairnstone's vice president of marketing. "Additionally, companies will return to competing on brand identity and value-added services, and not just price."

Copies of the Cairnstone report can be obtained by calling Ed Emerman at 609/452-5967.

Excerpted from the May 2001 supplement to Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2001. All rights reserved.

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