Tracking Health Insurers Across a Shifting Landscape

While broadly similar to those for life insurers, A.M. Best Co.’s criteria for analyzing health insurance carriers focus on additional factors such as benchmarks, ratios and qualitative factors relevant to the health care operating environment. Health insurers face a constantly evolving operating environment that now includes the Patient Protection and Affordable Care Act (PPACA), which is changing not only market dynamics for certain segments, but mandatory benefits and other requirements that can impact pricing.

-- Capitalization and earnings have improved over the past few years, but new, mandated minimum loss ratios and changes to the rate approval process may impact pricing and margins.

-- The implementation of health insurance exchanges in 2014 will overhaul distribution, particularly for the individual and small group markets.

-- Small health carriers concentrated in the individual and small group markets may be more vulnerable, lacking the scale and resources to develop innovative responses to changes in the environment and reduce administrative costs.

-- When evaluating health insurers’ balance sheet strength as part of the rating process, for a Secure rating—B+ (Good) and higher—A.M. Best calls for companies to have substantially more capital than what is assessed under the National Association of Insurance Commissioners’ Managed Care Organization Risk-Based Capital (MCORBC) company action level.

-- A.M. Best’s analysis of capital adequacy begins with calculating each operating insurer’s Best’s Capital Adequacy Ratio (BCAR), but beyond the BCAR assessment, other significant quantitative factors may include NAIC RBC; current and overall liquidity; underwriting leverage; equity per member per month (capital and surplus to member months); asset leverage; amount of debt or surplus notes; and changes in reserves.

-- In assessing operating performance, A.M. Best looks at trends in growth of earnings and return on revenue, but other important considerations, especially after the implementation of PPACA, are medical loss ratios and administrative cost ratios.

-- The business profile component of A.M. Best’s rating evaluation acknowledges that insuring health care is a local business and that the carrier’s dominance of the market in a state or even in part of a state can be an advantage, but geographic concentration also can make a company’s business vulnerable to regional regulatory constraints; less disciplined local competition; the local economy; and exclusion from opportunities to grow elsewhere.

As part of its continual review of its rating methodologies, A.M. Best has determined that the analytical approach used when rating health insurance companies is broadly similar to that used for rating life insurers and does not require a separate criteria publication. As such, the criteria report, Rating Health Insurance Companies, has been withdrawn and replaced with this special report, Tracking Health Insurers Across a Shifting Landscape.

Access a copy of this special report at http://www3.ambest.com/bestweek/purchase.asp?record_code=196254&AltSrc=26. BestWeek subscribers can download a PDF copy of all special reports as well as the associated spreadsheet data. Non-subscribers can access an excerpt of each special report and purchase individual reports and spreadsheet data.