Wednesday, December 19, 2012

Calling up the Reserves

Co-blogger Bob, FoIB Rick B and I have been engaged in an email discussion about carriers using their reserves to "buy down" current premiums. The uncertainties inherent in the ObamaTax make it even more complicated.

Rick got the ball rolling by posing this conundrum:

"When ObamaCare starts, how will carriers be assured of enough reserves to cover all the pre-ex that they’ll be paying?  You know there will be an obamaload of claims in the first few months."

Bob was quick to reply that "for certain they will get all the sick folks, just like what happened with PCIP. It won't take long for claims to exceed premiums. Of course the $63 per head reinsurance premium will help . . . . some. I doubt that money will flow quickly enough to really matter.

Reserves are for claim fluctuations and runoff claims. My guess is the carriers will start a new block for Guaranteed Issue (2014 business and later) and will run that as a separate line of business. Reserves will be established from excess premiums (ha-ha) and those reserves will be used to cover as much of the influx of big claims as possible. They can do some internal shifting of funds as needed, but in order to collect the reinsurance I am certain they will have to show losses.

A lot depends on the exchanges, subsidies, etc as to how much backlash there will be over being forced to give up the plan you had and the new premium levels.

I still maintain the feds don't have the money to pull this off nor will they have the mechanism in place to monitor everything, calculate subsidies, etc.

It will be interesting to say the least."

I was invited to join the fray, and wondered if there would actually be any reserves left. After all, it's not unreasonable to predict HHS Secretary Shecantbeserious mandating their use to subsidize costly new premiums.

Bob quickly jumped on that prediction:

"If HHS demands carriers use reserves to stabilize premiums, it is game over for the carriers. Statutory reserves are set by the states and designed to protect the policyholder (as well as the state guaranty fund). If reserves are depleted for this nonsense it jeopardizes the entire system."

[He says that if as if it's a bad thing, from Mme Secretary's point of view]

"Internally, carrier reserves are not one big pool but are separate accounting blocks. Statutory reserves by line of coverage, reserves by block (including closed books), claim stabilization reserves. There is nothing prohibiting the carrier from borrowing from one reserve block to shore up another but it is rarely done. States will conduct audits of carriers from time to time and if the reserves do not meet state guidelines the carrier is put on a watch list."

Mike disagrees with my premise altogether:

"This is not going to happen.  A reserve isn't a stack of money lying around pretending it's not profit.  It's really just part of claims already incurred that the insurance company must eventually pay.  One can argue about the level of required reserve, but HHS will lose any battle to use reserves as a  . . reserve.  As I've already said, "reserve" is a lousy name and induces people to misunderstand what they are.  Reserves are already committed to pay claims.  Therefore they cannot be spent a second time."

He also points out that " the cost of pre-existing conditions for people who buy a new policy on or after 1/1/2014 will be a cost the insurance company has not previously insured and which its premiums do not currently reflect. And therefore the insurance company will reflect the higher cost of its new policyholders on and after 1/1/2014 in its premium rates. It is from this latter group of policyholders - not the already-insured group -  that the obamaload of pre-ex claims will emerge."

Which brings us to yet another challenge: what happens when carriers, forced to use reserves to subsidize premiums, lack the funds to pay claims? Typically, that's where the states' Guarantee Funds step in, but it's not entirely clear what will happen when multiple carriers go down the tubes.

Perhaps the Mayans were optimists.
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