by Jacquelyn Connelly

After completing a financial analysis of the 258 health insurers participating in state and federal public exchanges, ALIRT Insurance Research, LLC reports that many of the smaller public health insurance carriers may be aggressively capitalized with poor underwriting and operating profitability.

According to the report, “Financial Trends: State/Federal Exchange Insurers,” 15% of public exchange insurers have four or less years of operating history. Of those, 12 were incorporated in 2013 or 2014—some with the express intent of writing business on the public exchanges.

The report also finds that only 42% of the public exchange insurers are rated by one or more of the four major public rating agencies. While 33% are owned by large publicly traded holding companies such as Aetna, Anthem, CIGNA, Humana or UnitedHealth Group and 19% are members of Blue Cross Blue Shield organizations, the other 48% are a mix of private and nonprofit organizations, including new co-ops and mutual insurers.

Why should agents who advise clients on exchange options be concerned? Many of these insurers may view the public exchanges as an important avenue for gaining revenue—and that’s a potentially hazardous strategy when combined with poor underwriting and weak capitalization.

According to David Paul, principal at ALIRT, a new health insurer entering the exchanges with lack of experience in underwriting health insurance is only the beginning of the problem. Many of these carriers are also entering the space “at a time when health insurance is going through a revolution,” he explains. “Underwriting has totally changed. The ability to underwrite like you used to is gone—essentially, you have to underwrite based on pretty liberal rules.”
And the consumer base for public health insurance is “essentially a brand-new population,” he adds. “It’s a lot of folks who have been uninsured before where you just don’t know if you’re going to get a lot of the adverse selection.”

That’s three strikes—and it’s not even the whole picture, Paul says. “Add a fourth strike if you grow quickly in that environment,” he points out. “Relatively thinly capitalized companies with lack of a parent, underwriting in this environment that’s totally changed both in terms of both how you can underwrite and the population—you could definitely see a scenario where a medical health system parent sets up an HMO, sees really bad experience for a couple years and then says ‘We should never have done this—let’s just cut our losses.’”

According to the report, the historic average ALIRT score range for health insurance carriers is 35-55. Of the public exchange insurers measured in this report, 28% had nine-month 2015 total ALIRT scores below 35, while only 9% achieved scores above 55. The disparity in distribution suggests weaker carriers could face financial stress if they grow too quickly and misprice business—and that those without substantial parent organizations with the ability and appetite to infuse capital when necessary could face regulatory action.

Statistically speaking, “to see a percentage at 28% is quite a bit above what’s normal,” Paul explains. “You definitely have a good-size population of companies that are owned by integrated medical health systems or privately held, so you have smaller companies that got very much interested in this right from the start whereas the bigger companies tended to stand back for the first year. As more insurers of more substantial parents get involved, that number will normalize some, but honestly I don’t expect that for several years.”

Companies with the lowest ALIRT scores tend to share several common features, including a surplus strain on earnings and surplus from rapid growth; weak and declining risk-adjusted capitalization and aggressive premium leverage; above-composite exposure to government-sourced business, particularly Medicare and Medicaid, and to the HMO business chassis; and lack of an appreciable parent and public ratings.

“The only danger isn’t necessarily the company going out of business,” Paul says. “Almost a bigger danger that’s going to happen more often is a company gets into financial trouble and drags its feet on claims because it’s one way to try to survive. And that honestly can be more painful to a person who’s going through some type of illness to have claims denied or to be run through the ringer when they’re under a lot of stress anyway.”

As an agent, navigating the nuances of public health insurer strengths and weaknesses will be crucial when guiding life-health clients. “We tend to think if you just buy health insurance then the insurer’s going to be around,” Paul says. “It’s important to understand you just don’t look at lowest price—you have to have a sense for whether these companies are going to be around. As an agent, you certainly don’t want to have that type of direct damage to your reputation.”

Jacquelyn Connelly is IA senior editor. - See more at: http://www.iamagazine.com/news/read/2015/03/06/new-report-questions-strength-of-public-exchange-insurers#sthash.Ms1w86hF.dpuf