Doniela Bliss, Director of AM Best, discussed insights from a recent report, which suggests that rising healthcare utilization and medical inflation are increasing the role of health reinsurance.

Health insurance is one of the fastest growing sectors, generating nearly 50% of global insurance premiums. However, it occupies a less prominent position in the reinsurance market.

In an interview, Bliss explained that several features of health insurance reduce the need for reinsurance. Health insurance policies are typically short-term, allowing for annual repricing and providing minimal exposure to catastrophic events, thus reducing the need for reinsurance.

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However, health insurance products often operate with relatively high combined ratios and large capital requirements, which drives demand for reinsurance. As primary insurers grow, they increasingly use reinsurance to enhance capital flexibility.

According to Bliss, the primary function of health reinsurance is not to protect against losses but to support growth and ease capital pressures. As a result, health reinsurance has expanded in the United States and around the world.

Growth in the US sector

In the US health reinsurance market segment, we have seen a significant increase in the volume of premiums ceded between health and life insurers. The volume reached $110 billion in 2023, representing about 7% of total written premiums, up from $49 billion in 2014.

This growth was driven by lower profitability in primary products, higher cost health claims, and the need for primary insurers to improve capital structures.

In 2023, U.S. insurers face new challenges, particularly in the Medicare Advantage segment, which now has the highest premium volume in the market. Profitability in this segment has declined significantly due to high utilization across services.

This trend continues through 2024, with future profitability under pressure due to pending regulatory changes and increased scrutiny from the public and lawmakers.

Medicaid earnings also declined, as expected, following states’ redetermination of eligibility following the end of the COVID-19 public health emergency. However, this decline was partially offset by better performance in the commercial segment.

Overall, U.S. healthcare sector earnings have remained flat, but margins have contracted significantly. Reinsurance has been used to mitigate the impact of these lower earnings on capital, allowing premium growth to continue. Given the current interest rate environment and high cost of debt, reinsurance has become a more attractive option to support capital needs.

Impact of the pandemic on the sector

The COVID-19 pandemic has had a significant impact on the health insurance industry over the past few years. During the first two years of the pandemic, health insurers in the United States and around the world saw profits rise due to lower claims utilization. Lockdowns and public precautions led to fewer doctor visits and postponement of elective medical care, while people continued to pay premiums.

However, by late 2022, health insurance saw a return to traditional patterns of care, coupled with pent-up demand due to COVID-related disruptions. Additionally, there was an increase in claims severity due to delayed or incorrect diagnoses, particularly for cases involving cancer and heart disease.

From a reinsurer’s perspective, the first two years of the pandemic were beneficial for the healthcare sector, helping to offset losses in the Covid-19 mortality segment. However, recent trends in health insurance and uncertainty about future utilization and claims severity have prompted some global reinsurers to reconsider their growth plans in the sector.

As for the health insurance segments that cede the most premiums to reinsurers, Bliss notes that the three largest segments in the United States are Commercial, Medicaid, and Medicare Advantage.

Over the past decade, most ceded premiums have come from government programs due to strong growth and limited profits. However, over the past three years, the commercial business line has contributed significantly to growth, with commercial ceded premiums reaching $20 billion in 2023, compared to $12 billion in 2021.

This increase is partly due to losses incurred by the commercial sector in 2021 and 2022, particularly in individual exchange products. Reinsurance arrangements helped ease pressures and support capital during this period.

For Medicaid, which ranks second in ceded premiums, most premiums are ceded to affiliates, with major insurers using their corporate structures to distribute premiums and improve capital.

In lines of business where premiums are ceded to non-affiliated companies, commercial insurance, Medicare Advantage, and medical stop-loss insurance stand out. While medical insurance is relatively small in size compared to commercial insurance and Medicare Advantage, it uses reinsurance more heavily due to the disproportionate impact of high-cost claims.

The increasing number and cost of claims hitting reinsurers due to accumulated losses has led to a significant tightening of reinsurance rates in this sector.

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