Loss ratio games

Obamacare creates an insurance puzzle: How do you raise your loss ratio but keep profits the same?

The NAIC of all people has the answer.

Loss ratio, of course, is losses divided by premium, and the definitions of the two terms is pretty important. I think every actuary eventually runs into the underwriter whose loss ratio is calendar year paid losses divided by written premiums, except when the paid loss comes from ‘an old claim that we’ve known about for years.’

And at the risk of really belaboring the obvious, if you want to raise your loss ratio, you can either increase your numerator or decrease your denominator. NAIC is saying it’s OK to do both.

Turns out the health care reform bills didn’t define medical loss ratio too precisely; it left that job to the states. So Rick Diamond, an actuary with the Maine DOI, has drafted an NAIC memo that interprets the law to allow:

  • Raising the numerator (losses) by including as losses “activities that improve health care quality,” according to this Bloomberg article.
  • Lowering the denominator (premium) by excluding state and federal taxes from the definition of premium.

As it is, health insurers are already pretty close to the goal (80% for smaller plans, 85% for larger ones). Last year, for example, WellPoint booked an 83. UnitedHealth booked an 82.

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