Health Annual statements: A way to assess insurers’ financial health May 20, 2015 Cheryl Fish-Parcham.

healthAnnual statements:

A way to assess insurers’ financial healthMay 20, 2015

Cheryl Fish-Parcham

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Broad brush

• Go to NAIC Consumer Information Source• Look up the company name.• Pick the company with the correct home office – you

might need to check with a state insurance department to do this.

• You’ll see graphs with broad indicators of how the company’s premiums, assets, income or losses have changed over time, but these may not provide enough context.

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Getting more from the annual statement

• You can download five for free from the NAIC Consumer Information Source website.

• Look at:– How much money the company made per premium dollar – this

allows you to compare companies of different sizes and how their profits per premium dollar change over time

– How much more the company holds in capital and assets beyond what it needs to stay solvent – regulators have standards for what a company needs; companies that continue to build far more than they need deserve extra premium scrutiny

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How much money the company made per premium dollar: measure #1

1. Net income to net premium:

Income from all sources including investments minus expenses (such as for medical care, administration, certain taxes including federal income tax)

divided by total amount collected from premiums (less any medical loss rebates paid)

In a health annual statement: page 4, line 32 ÷ page 4, line 2

In a life, accident and health statement: page 4, line 35 ÷ page 4, line 1

Multiply by 100 to express this as a percent.

Example

Net income divided by Net premium (389,098,648 ÷ 4,813,980,720)*100% = 8.08%

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How much money the company made per premium dollar: measure #2

2. Net underwriting gain to net premium:

Money insurers retain from premiums after paying medical claims, administrative expenses and most taxes (but not federal income tax)

Divided by total amount collected from premiums (less any rebates)

In a health statement: page 4, line 24 ÷ page 4, line 2

Life, accident and health – may be in a “non-key statement”:

Schedule H, p. 37, line 14 ÷ page 4, line 1

Multiply by 100 to express this as a percent.

Example

Net underwriting gain divided by Net premium (563,833,020 ÷ 4,813,980,730)*100% = 11.71%

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What to make of this

• Positive ratios: the insurer is making money, even if small.• Large ratios: the insurer is making lots of money. There is no accepted

standard about how much is too much for a for-profit, but large ratios show room for scrutiny.

• Trends over time: you might see that the insurers’ profits are following a similar line as in other years – that is, no big change due to ACA.

• One insurer compared to another in the state: these statements may reflect the company’s business over several states, but you can still see if a company with high proposed premiums is currently doing worse than others proposing lower premiums.

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Capital and surplus beyond needs

• Adjusted capital (what the insurer holds)

Divided by

Authorized control level risk based capital – an amount calculated according to a formula that regulators believe the insurer needs to stay solvent; regulators take control of a company if its capital drops to the authorized control level, and they begin to watch a company when its capital is three times the authorized control level.

In a health statement: page 29, line 14 ÷ line 15

In a life, accident, and health statement: page 22, line 30 ÷ line 31.

Multiply by 100 to express this as a percent.

Example

Adjusted capital divided by Authorized control level risk based capital 832,942,311 ÷ 182,497,863 = 4.56

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What to make of this

• A ratio below 3 puts an insurer on regulators’ “watch list” under an NAIC model law – that is, they are beginning to be in a risky zone. Some insurers strive to keep a ratio of at least 5.

• Though there is no national standard for “too much”, some regulators have required nonprofits to give money back to the community, stop raising rates, or forfeit their nonprofit status when their ratio was much higher than required (e.g., 7 or more)

• There is room for scrutiny when an insurer hikes premium rates despite a high and growing ratio.

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One note of caution

• The annual statement reflects experience through 2014.• Insurers are proposing 2016 rates.• Start-up problems that some insurers experienced with

some marketplaces in 2014 improved in 2015 and will continue to do so in 2016.