While medical insurance has advanced to the point where accurate predictions can be made about the annual costs of insurance claims, some situations are outside even the best predictive models.
Such emergencies are what led to the creation of reinsurance.
Also known as stop loss insurance or excess of loss insurance – although these are simply two of the most common varieties of reinsurance – these policies help protect insurance companies from events that can lead to costly claims far beyond what they would typically expect. Understanding medical reinsurance is critical to managing risk from emergent claims and similar.
The Unpredictable World of Insurance
Most predictive models can allow employers (or the insurers they contract with) to project the average number and amount of normal claims over a given year with an acceptable degree of accuracy. There is a large enough database to make such analysis viable.
The same, however, cannot be said for unexpected events. It is far more difficult – perhaps impossible – to create a reasoned, predictive statistical model that can project unexpected events.
This is why insurance companies take out insurance of their own, essentially protecting themselves from unforeseen events (much like an individual). Maintaining a successful insurance business requires great skill in managing risk.
In the face of catastrophic events, expensive medical treatment or emergencies, reinsurance helps a larger insurer remain solvent and avoid the kind of financial damage a run of unpredictable events can inflict.
For smaller insurers, purchasing reinsurance can increase the capacity of the company, allowing them to take on larger clients and the possibility of more risk. This in turns helps them compete against better-positioned, larger companies.
Understanding Medical Reinsurance: The Various Types
As with individuals, companies taking out reinsurance or stop loss policies have a variety of options from which to choose. To help with understanding medical reinsurance, here are some of the more common forms of reinsurance.
Proportional reinsurance. In this type of policy, the reinsurer agrees to take on a pre-determined percentage of the insured companies losses.
Non-proportional reinsurance. Under this, this insurer pays only if the losses incurred by the insured exceed a certain amount over a given period of time. For example, an insured company might buy a policy that pays only if the amount of losses exceed $1 million. The insured can get covered beyond that amount, but must absorb the original $1 million cost.
Excess of Loss. This insurance comes in many different forms. They include “per risk” and catastrophe. Per risk policies are typically taken out for one large client – a construction project, for example. Catastrophe reinsurance allows insurers to be reimbursed for losses involving multiple policy owners (many homes destroyed in a natural disaster, for example).
Reinsurance in the Medical Field
For medical stop loss reinsurance, coverage typically is either specific (major costs associated with one policy owner) or aggregate (major losses from a number of different policies).
In aggregate reinsurance, there is usually a set amount in the contract annually over which the reinsurance will reimburse costs at the end of each contract year.
The types of events that could trigger the need for reinsurance include:
- Severe trauma or burn cases
- Low birth weight babies
- Complicated pediatric care
- Specialty care for specific, chronic conditions
While there is some debate about providing government-funded reinsurance, at this time the private sector – where dozens of companies offer reinsurance – is the only choice.