5 minute read
Metrics that Matter: Deciphering Minimum Loss Ratios
By Kristi Hardenbergh, FSA, MAAA Consulting Actuary, Sydney Consulting Group
The term minimum loss ratio (MLR) is incredibly important when discussing both a product’s regulatory compliance and profitability, but for such an essential term, it is often misunderstood or misused. The National Association of Insurance Commissioners (NAIC) defines a loss ratio generally as “a measure of the relationship between claims and premiums”. In the context of pricing and profitability in the supplemental health space, MLR refers to an incurred loss ratio; which is the expected incurred claims, plus any changes of reserves for active claims and claims incurred but not reported (IBNR). There may be several loss ratios described within an actuarial memorandum: 1) the target loss ratio; which is the loss ratio a Company is targeting when setting premium rates, 2) the anticipated loss ratio; which is the “expected” loss ratio at each duration based on financial modeling; and 3) the minimum loss ratio, which is the lowest acceptable ratio of claims to premiums that regulators will allow. These loss ratios could all be the same or each could be different.
Knowing the MLR requirements at the state level is obviously important from a regulatory compliance perspective, but it is also important for determining the “ceiling” of how premiums will be shared between business partners. If 50% of the premium is expected to be made up of benefit payments, that leaves the other 50% to encompass commissions, maintenance and acquisition expenses, enrollment firm subsidies, tech credits, premium taxes, licenses, and carrier profits Working backwards from a state’s MLR makes it easy to see how stretched profit margin can become in a state with high MLR requirements.
In the group market, most states do not have specific regulations for the minimum loss ratio of supplemental products, though there are notable exceptions (Colorado, Delaware, Florida, and New York, to name a few). In the absence of a minimum required loss ratio, the industry typically looks to the NAIC Model Regulation No 134 for guidance. While intended for the individual market, the model regulation provides table loss ratios based on renewability provisions and product type (medical expense and loss of income or other) and is standardly used as a benchmark for group filings as well.
NAIC Model Regulation No 134 also provides a formula for reducing the table loss ratio if a policy is expected to have a low average annual premium, or for increasing it in the case of a high average annual premium. As most supplemental plans fall into the low average annual premium category, many products in the market are filed with minimum loss ratios of 50% or less. However, just like with differing state regulations, states can also vary on how this formula is applied and how much of a reduction in MLR they will allow.
There are a handful of states requiring higher minimum loss ratios and even a few states (e.g., New Jersey, Washington) that have minimum loss ratio requirements expressly for specified disease (critical illness and cancer) policies.
These required MLR’s can be as high as 75%. In the individual market, there are a greater number of states with specified regulations for all products, and when a state does not provide one, the NAIC Model Regulation No. 134 is an appropriate guideline.
In general, despite pricing to statutory minimum loss ratios or higher, claim experience across the industry has been favorable and historical loss ratios have been low. It is probably not a coincidence that we have also seen an increase in state Departments of Insurance requesting experience filings a few years after approval. Additionally, brokers are requesting MLR experience in renewal and takeover opportunities, potentially trying to negotiate additional margin for low loss ratios. In general, we caution carriers not to disclose MLR experience, particularly, as experience can be deceiving. For example, a critical illness product rated on an issue age basis might be priced to a 50% loss ratio over the lifespan of the product, however, the claim cost pattern for benefits such as invasive cancer and heart attack is a steep, increasing slope. As a result, the first years of the product may be expected to run a loss ratio below the minimum, whereas later durations will run loss ratios well over 100%.
In conclusion, here are a few main takeaways for understanding MLRs:
If the MLR is higher, more of the premium must go to paying claims, which leaves less to pay for other expenses that a carrier would incur. It is imperative that teams work together to get a clear idea of all types of expenses, fees, commissions, profit targets, etc., so actuaries can appropriately price the product to both abide by state regulations and company metrics. States can differ on what they require, which results in added complexity of pricing and filing.
Kristi Hardenbergh is a Consulting Actuary for Sydney Consulting Group. She is based out of Denver, Colorado Kristi joined Sydney in 2020 after previously working as an associate actuary at Milliman in Tampa, FL. She has spent her entire actuarial career in the supplemental benefits space, with extensive experience assisting clients in pricing, product development, rate filings, and valuation. Prior to entering the actuarial profession, Kristi was a professional ballet dancer with the Sarasota Ballet.
