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The ACA’s Risk Spreading Mechanisms: A Primer on Reinsurance, Risk Corridors and Risk Adjustment

January 20, 2015 Comments off

The ACA’s Risk Spreading Mechanisms: A Primer on Reinsurance, Risk Corridors and Risk Adjustment
Source: American Action Forum

The 2010 Affordable Care Act (ACA) health reform law established state-based health insurance exchanges to provide an individual market for qualified health insurance plans. The state exchanges sell insurance plans to any citizen, regardless of health status. Enrollees who purchase plans through an exchange can receive federal premium subsidies if their household income falls between 100 and 400 percent of the federal poverty level. This primer provides an overview of the ACA’s risk mitigation provisions that apply to individual and/or small group market plans: reinsurance, risk corridors, and risk adjustment.

While the exchanges are implemented and administered by either the state or the federal government, the qualified health plans offered are sold by private insurance companies and designed to be in compliance with the ACA regulations. For insurers, offering a plan on the exchange is very different than offering a plan on the pre-ACA individual market or to a group purchaser such as a large company. For one, the issuer offering their first exchange plan in 2014 had no way of knowing the health status or previous claims history of the applicants; some exchange enrollees may have been uninsured for many years and have a long list of unmet medical needs. Secondly, the applicant must be charged the same premium as everyone else in their age band, and the oldest applicants cannot be charged more than three times the rate of the youngest. And finally, insurance companies are selling a new insurance product, with newly mandated benefits, and limits on cost-sharing, but they have no control over how many, or how few, individuals enroll.

Issuers priced their products according to their best projections. However, for the reasons listed above, uncertainty about risk pools is larger than for a mature market. In order to improve the incentives for insurers to participate, the ACA includes three risk spreading mechanisms: temporary reinsurance, temporary risk corridors, and permanent risk adjustment, all of which address potential risk pool issues by limiting the amount an insurance company can lose by participating in the marketplace. Risk adjustment is designed to spread risk among plans to prevent adverse selection, reinsurance helps plans with individuals who have unexpectedly high medical costs, and risk corridors protect both health plans and the federal government against uncertainty in pricing during the initial years of the ACA’s market reforms. These mechanisms allow insurance companies to price their products more competitively, as any significant losses will be partially offset.

CBO — Federal Reinsurance for Terrorism Risk: An Update

January 8, 2015 Comments off

Federal Reinsurance for Terrorism Risk: An Update
Source: Congressional Budget Office

The federal program that provides insurance against the risk of terrorism expired at the end of 2014. Without such a program, taxpayers will face less financial risk, but some businesses will lose or drop their terrorism coverage and economic activity might slow if a large terrorist attack occurs. Last year, the Congress considered legislation to reauthorize the program but shift more risk to the private sector. Other options include limiting federal coverage to attacks using nonconventional weapons, and charging risk-based prices for federal coverage. CBO has examined the likely effects of different approaches on the private sector and on the federal government.

New From the GAO

January 7, 2015 Comments off

New GAO Reports
Source: Government Accountability Office

1. Defense Base Act Insurance: State Department Should Evaluate Its Open Market System and Incorporate Leading Practices into Any Future Single Insurer Solicitation. GAO-15-194, January 6.
http://www.gao.gov/products/GAO-15-194
Highlights – http://www.gao.gov/assets/670/667839.pdf

2. Troubled Asset Relief Program: Treasury Continues to Wind down Most Programs, but Housing Programs Remain Active. GAO-15-197, January 6.
http://www.gao.gov/products/GAO-15-197
Highlights – http://www.gao.gov/assets/670/667834.pdf

CRS — Terrorism Risk Insurance Legislation: Issue Summary and Side-by-Side Analysis (December 11, 2014)

December 18, 2014 Comments off

Terrorism Risk Insurance Legislation: Issue Summary and Side-by-Side Analysis (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Prior to the September 11, 2001, terrorist attacks, insurance covering terrorism losses was normally included in commercial insurance policies without additional cost to the policyholders. Following the attacks, this ceased to be the case as insurers and reinsurers pulled back from offering terrorism coverage. It was feared that a lack of insurance against terrorism loss would have a wider economic impact, particularly because insurance coverage can be a significant factor in lending decisions.

This report briefly outlines the issues involved with terrorism insurance, summarizes the extension legislation, and includes a side-by-side of the current TRIA law and the bills that have been passed by the Senate (S. 2244), reported by the House Committee on Financial Services (H.R. 4871), and passed by the House (S. 2244 with a substitute amendment). For more a more in-depth treatment of the issues surrounding TRIA, please see CRS Report R42716, Terrorism
Risk Insurance: Issue Analysis and Overview of Current Program, by Baird Webel.

New From the GAO

December 12, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. DOE and NNSA Project Management: Analysis of Alternatives Could Be Improved by Incorporating Best Practices. GAO-15-37, December 11.
http://www.gao.gov/products/GAO-15-37
Highlights – http://www.gao.gov/assets/670/667405.pdf

2. Nuclear Weapons: DOD’s Plan for Implementing Nuclear Reductions Generally Addresses Statutory Requirements but Lacks Some Detail. GAO-15-89R, December 11.
http://www.gao.gov/products/GAO-15-89R

3. Small Business Credit Programs: Treasury Continues to Enhance Performance Measurement and Evaluation but Could Better Communicate and Update Results. GAO-15-105, December 11.
http://www.gao.gov/products/GAO-15-105
Highlights – http://www.gao.gov/assets/670/667449.pdf

4. Flood Insurance: Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes. GAO-15-111, December 11.
http://www.gao.gov/products/GAO-15-111
Highlights – http://www.gao.gov/assets/670/667412.pdf

5. DOD Contract Services: Improved Planning and Implementation of Fiscal Controls Needed. GAO-15-115, December 11.
http://www.gao.gov/products/GAO-15-115
Highlights – http://www.gao.gov/assets/670/667431.pdf

6. Federal Subcontracting: Linking Small Business Subcontractors to Prime Contracts Is Not Feasible Using Current Systems. GAO-15-116, December 11.
http://www.gao.gov/products/GAO-15-116
Highlights – http://www.gao.gov/assets/670/667409.pdf

7. Professional Misconduct: DOJ Could Strengthen Procedures for Disciplining Its Attorneys. GAO-15-156, December 11.
http://www.gao.gov/products/GAO-15-156
Highlights – http://www.gao.gov/assets/670/667402.pdf

New From the GAO

November 20, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. Ford-Class Aircraft Carrier: Congress Should Consider Revising Cost Cap Legislation to Include All Construction Costs. GAO-15-22, November 20.
http://www.gao.gov/products/GAO-15-22
Highlights – http://www.gao.gov/assets/670/667091.pdf

2. Climate Change: Better Management of Exposure to Potential Future Losses Is Needed for Federal Flood and Crop Insurance. GAO-15-28, October 29.
http://www.gao.gov/products/GAO-15-28
Highlights – http://www.gao.gov/assets/670/666697.pdf

3. Financial Stability Oversight Council: Further Actions Could Improve the Nonbank Designation Process. GAO-15-51, November 20.
http://www.gao.gov/products/GAO-15-51
Highlights – http://www.gao.gov/assets/670/667095.pdf

4. Bank Capital Reforms: Initial Effects of Basel III on Capital, Credit, and International Competitiveness. GAO-15-67, November 20.
http://www.gao.gov/products/GAO-15-67
Highlights – http://www.gao.gov/assets/670/667113.pdf

5. Small Business Innovation Research: Change in Program Eligibility Has Had Little Impact. GAO-15-68, November 20.
http://www.gao.gov/products/GAO-15-68
Highlights – http://www.gao.gov/assets/670/667099.pdf

6. Building Partner Capacity: State and DOD Need to Define Time Frames to Guide and Track Global Security Contingency Fund Projects. GAO-15-75, November 20.
http://www.gao.gov/products/GAO-15-75
Highlights – http://www.gao.gov/assets/670/667116.pdf

Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations

November 19, 2014 Comments off

Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations
Source: Ceres

Amid growing evidence that climate change is having wide-ranging global impacts that will worsen in the years ahead, Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations, ranks the nation’s 330 largest insurance companies on what they are saying and doing to respond to escalating climate risks. The report found strong leadership among fewer than a dozen companies but generally poor responses among the vast majority.

This report summarizes responses from insurance companies to a survey on climatechange risks developed by the National Association of Insurance Commissioners (NAIC). In 2013, insurance regulators in California, Connecticut, Minnesota, NewYork and Washington required insurers writing in excess of $100 million in direct written premiums, and licensed to operate in any of the five states, to disclose their climate- related risks using this survey.

The aim of the survey, and Ceres’ analysis of the responses, is to provide regulators,insurers, investors and other stakeholders with substantive information about the risks insurers face from climate change and the steps insurers are taking—or are not taking— to respond to those risks. Because virtually every large insurer operates in at least one of the mandatory climate risk disclosure states, this analysis effectively opens a window into the entire industry. The report distills key findings and industry trends, and includes company specific scores based on disclosed actions taken to manage climate risks. It also offers recommendations for insurers and regulators to improve the insurance sectors’ overall management of climate change risks.

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