Rate Increases in Stop Loss or Pie in the Sky?
Date Posted: Thursday,
February 27, 2025
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As of recently, some industry colleagues are suggesting that the stop-loss market will produce low double-digit rate increases in 2025. This would suggest that the market is or will be firming up from years of very competitive pricing to the consumers' benefit but to the stop-loss insurance industry's financial disadvantage.
In my opinion, there are a number of viables and measurements that can play into, if not shape, the narrative. That said, I believe that most parties will likely agree that medical costs are out of hand, and from the insurance industry's perspective, the stop-loss market has been and continues to be very soft. Therefore, stop-loss is in need of a pricing correction to ensure its long-term viability to consumers.
With the above in mind, when a carrier is expressing a rate increase, it's important to consider if the increase was the result of any offsets from other products they offer. Multi-line or multi-product carriers leverage this capability to cross-sell their products to the same customer. Generally, this type of packaging is provided to larger groups. The advantage is that the carrier can present an aggregate composite pricing for the group. That is, at renewal, some products will be lower and others higher from the current pricing; however, the bottom line in totality of the renewal price (aka premium) may be relatively neutral when comparing to the current premium.
Per the National Association of Insurance Commissioners' (NAIC) Accident and Health (A&H) Policy Experience Report for 2022, the A&H industry premium was valued at approximately $1.2 trillion, with stop-loss as a subset at $31.6 billion. This means that stop-loss equates to about 2.5% of all A&H premiums. At the A&H group business level, stop-loss represents approximately 7% of the premium. In both cases, stop-loss represents a small portion of the A&H industry. Another consideration, the top ten stop-loss players control approximately $19.8 billion, which is 63% of the market.
On the other side of the premium are losses and expenses. Often, the industry or carrier will state a loss ratio; however, unless it's referenced as combined or net, it's gross, which does not contemplate the expenses incurred (administration, taxes, bureaus, fees, commissions, etc.). These total expenses can range from low-20 to mid-30 additional percentage points. Incorporating the expense ratio to the gross ratio loss is the true measurement of the industry's or carrier's financial performance. Per the NAIC report noted earlier, the A&H industry gross loss ratio of 2022 was 85% with a five-year average (2018-2022) at 84%. At the group level, it's 84.4% and 83.3%, respectively. The historical loss ratio for stop-loss has been challenged due to carrier and reinsurer reporting. That said, for 2022, the gross loss ratio for stop-loss is projected at 84%. Therefore, it might not be too much of a stretch to assume that the loss ratio of stop-loss will be somewhat similar to the A&H and group level historical loss experience.
Another consideration is the continuous entrance of new players into stop-loss. While it's good to provide consumers with alternatives to price, product, and service, at the same time, any industry should be careful not to compromise the consumers' outcome but, more importantly, the industry's financial health. While adding market capacity can be a good thing - as the adage goes: Too much of a good thing can become a bad thing - the reality is that most of these new players are funded by private equity looking for a quick return on their investment with limited consideration to the industry's loss ratio. Therefore, it's unfortunate that many new players will “buy” or “burn” their way into the market, thus reducing the needed underwriting discipline to achieve underwriting profit.
Technology has been and will continue to be a vital resource in the insurance industry. Unfortunately, this segment has added additional fuel to the fire. Many players, especially new entrants, are relying on predictive modeling or artificial intelligence underwriting models to drive their operations and manage their expenses. This technology has been largely employed to target small and fully insured groups. The concept can serve well, especially in the fully insured environment when the ground up data offers credible predictability.
The stop-loss industry is looking for options for collecting loss data in lieu of obtaining from the claims payor. Unfortunately, unless the underwriting portfolio is of credible size (law of large numbers), attempting to obtain claimant information to make it into meaningful data for underwriting is similar to one's inability to hit the broadside of a barn. Whereby inviting claims frequency and a compromised loss ratio. The best data source for underwriting is claims information from the claims payor. It'll be no surprise that as claim issues arise due to predictive and AI underwriting, the industry will look to employ predictive modeling and AI in claims, without first addressing the initial and/or primary issue. That is, the issue may be less claims related and more to do with risk selection and pricing. To that end, I'm a believer that predictive and AI modeling should be used only as tools, and ultimately rely on the underwriters' judgement based on their experience and skills.
Unlike other products, which are mostly risk transfers, stop-loss is an excess product that not only transfers risk but also should be seen as a financial instrument intended to protect an employer from fortuitous large losses. Therefore, it is not intended to transfer the employer's claims frequency to the stop-loss carrier. Ideally, the deductible should be affordable for the employer, but high enough to limit the number of claims exceeding the deductible to no more than a handful. Therefore, attempting to model, especially loss rating/experience, any excess insurance product can prove difficult, because by the nature of the product, its severity driven, making it more difficult to predict. Hence, the experienced and skilled underwriter is an invaluable asset in the art of Kentucky windage. These unique and valuable soft market attributes are discussed in a separate article, “The Art and Understanding of Underwriting Practices.”
As you may have gathered from the loss ratio discussion above, the insurance industry is often challenged in making an underwriting profit – whereby the combined or net loss ratio is less than 100%. Therefore, the insurance industry relies on their investment income until the stock market is not in a position to offset the combined loss ratio. Consider the Dow, which has grown 24% in the last year and nearly 55% during the past five years. S&P was nearly 31% and 89%, respectively.
In my opinion, meaningful rate increases will likely be achievable when one of two things occurs: tightening of the reinsurance market or the stock market starts to perform poorly. Until then, on a monoline basis, I anticipate that the best case for stop-loss is mid-single-digit rate increases for the foreseeable future. While the industry will agree that a significant rate increase is needed to achieve an underwriting profit, I believe the reality is that the market will remain soft for all the reasons noted.
Source: Joe Dore is president of USBenefits Insurance Services.
USBenefits Insurance Services, LLC DBA Employer Stop Loss Insurance Services, LLC (USB) is a full service Managing General Underwriter. USB officially launched in July of 2007. Our founding members believed that to be successful, understanding clients' current and future needs comes first. That simple principle has shaped all subsequent development of the company and is the foundation on which USB has grown. Since then, USB continues to be a viable stop-loss market to third-party administrators, brokers, consultants, and other forms of stop-loss/employee benefits producers, as well as a product line resource to USB's customers and stop-loss community. USBenefits has complete responsibility for all administration, claims, and underwriting decisions. Staffing includes claims, underwriting, administrative, and marketing professionals who work in concert to deliver not only financially stable stop-loss products but unparalleled stop-loss services. Your goal is USB's goal – to provide the best possible outcome for the employer.
https://www.usbstoploss.com/
