A LEARN Session for Brazil
By Kristi M. Bohn
Reinsurance News, February 2023
The Society of Actuaries’ Reinsurance Council established the Life Insurance Education and Reinsurance Navigation (LEARN) program in 2009 to provide reinsurance education to insurance department regulators and other interested parties.
Insurance regulators often do not have the financial support to obtain continuation credits, and reinsurance is a topic that is typically not front-and-center in regulators’ daily work. From a U.S. regulatory perspective, reinsurance is considered a contract between two savvy parties, thus not needing the degree of regulatory attention that direct insurance products warrant. That being said, risk transfer is on many a regulator’s watch list, and financial regulation by the reinsurer’s domestic state regulators is a critical topic for state regulators as well.
While many early requests for LEARN sessions came from financial and life insurance state regulators, recently several requests have come in for education about health reinsurance. These have come not just from U.S. states, but also—to the program’s delight—from Brazil. With all of these new requests for sessions, section council member Linda Xu, a vice president and actuary in RGA Reinsurance Company’s Global Financial Solutions unit, who started working on LEARN this year, reached out to contacts at the SOA to recruit more volunteers with health reinsurance backgrounds to the LEARN effort.
I stepped up, as did Annette James, a principal at the actuarial consulting firm NovaRest and a member of the Board of Directors of the American Academy of Actuaries. Both Annette and I were state regulators in the U.S. for several years before taking on our current roles, and so still have a good grasp of what our former colleagues consider when it comes to reinsurance and health insurance.
The Brazil request was unique: While LEARN has a substantial slide deck that could yield a full day of continuing education credits, the Brazil request required we take a step back and find out more about that market’s terminology as well as regulatory differences between the U.S. and Brazil, so that we could ensure that we were communicating relevant information and using appropriate terminology. To that end, we recruited Ronald Poon-Affat, director of Life and Health at IRB Re, which is the largest reinsurer in Brazil, who educated us ahead of time on some of the country’s regulatory, reinsurance, and health insurance industry concerns. He is also an active volunteer for the SOA, including as an editor for this newsletter. We also asked health regulators in Brazil what topics they would like us to cover. From their request for a timed agenda and an advance copy of the presentation indicating the specific topics to be covered, we could guess that they were interested in two hours (virtual) of continuing education credits.
One topic Brazilian regulators wished us to cover is how U.S. state regulators address “proportionality.” This was not a term we were familiar with, as it is not a common term in the U.S. Proportionality is important in the many countries where regulators focus their time and efforts on larger insurers, as these efforts affect more people. A valuable summary of proportionality is provided in a July 4, 2018, speech by Fernando Restoy posted on www.bis.org. Mr. Restoy is the chairman of the Financial Stability Institute, Bank for International Settlements, and he explained that “the concept of proportionality, embedded in all legal systems, stems from the need to keep the level of public intervention—in the form of rules, restrictions or sanctions—appropriate to what is actually needed to achieve the desired social objective.” This is akin to the recent federal attempt in the U.S. to designate some financial institutions as “too big to fail.”
Our course covered the idea that U.S. insurance regulators instead generally devote more time to those entities which are heading toward, are in, or are coming out of, a position where insolvency is a high possibility. This risk-based focus trumps the consideration of the overall size of the insurer. While every insurer’s financial situation gets some attention quarterly and annually from its domestic regulator, regulators spend the majority of their analysis and efforts focusing on where the greatest risk of insolvency lies.
This led us to include a discussion of risk-based capital (RBC). We learned from Ronald ahead of time that while Brazil has RBC guidelines in place for life insurance, it does not yet have them for health insurance. We included information about how H2, i.e., underwriting risk (risk of mispricing), and sometimes H0, i.e., affiliate risk (risk from other insurance and non-insurance entities affiliated with the insurer), are major drivers of U.S. health RBC calculations. We did not go into all of the details about RBC, but suggested RBC as a topic for a follow-up course. (Annette apparently loves the RBC topic—who knew?)
We started our course by talking about how U.S. state regulatory departments are structured, and how the structure of the National Association of Insurance Commissioners (NAIC) typically mirrors that of state departments’ functional areas (e.g., market conduct, rate review, enforcement, forms review, financial analysis, policy, and more). We then discussed how even though there are 50 states in the U.S., plus six territories (including Puerto Rico, Guam, and the District of Columbia), each of which works separately on its own insurance regulation, states and territories do communicate with one another, and focus their efforts via the NAIC to standardize insurance laws. We also discussed the NAIC’s crucial role in warehousing statutory financial data, and the importance state regulators place on creating a level playing field for insurers in terms of policy forms and rates.
Other topics we covered included:
- How, when it comes to companies facing financial difficulties, regulators maintain strong confidentially so that a company may be transparent and comprehensive as it shares its progress and plans with the state regulator.
- The biggest insolvency risks health insurers in the U.S. face, which are growth, mispricing, and fraud.
- How federal regulators and state health regulators work both together and separately in the U.S.
- Insurance companies in the U.S. are state regulated, but certain aspects of health cover, such as Medicare and Medicaid and certain Affordable Care Act (ACA) coverages, are regulated by the Centers for Medicare and Medicaid Services (CMS), which is a federal agency, and it coordinates with states on these covers.
- State regulators also often receive and refer complaints on self-insured employer plans to the Internal Revenue Service (IRS) or the Department of Labor (DOL), and even on occasion CMS, since ERISA exempts self-insured employers from state regulation.
- How both the Enterprise Risk Management (ERM) approach to risk management and the Own Risk and Solvency Assessment (ORSA) regulatory framework have played roles in evolving the governance of health insurers.
We ended our course with a review of lessons learned in recent years by U.S. health insurers, starting with the widespread underwriting losses created by the ACA in 2014 and 2015, the consequences of the 2014 rollout of guaranteed issue underwriting in the individual major medical market. Pricing misestimation risk in most states’ individual markets has dampened since 2015, except for the widespread underwriting gains in 2020 and 2021 caused by the pandemic’s influence on delayed or averted health care services.
We touched upon the political risk stemming from the defunding of the risk corridor program, implemented in 2014 and in place from 2014 to 2016 to partially offset ACA underwriting losses.[1] Risk corridor lawsuits eventually prevailed in favor of insurers, albeit much too late to prevent the insolvency of more than a dozen new entities formed under the ACA.
We also talked about the important role risk adjustment has played in creating a level playing field in the individual and small employer group market. Not long ago, the approximately $12 million treatment cost for one hemophilia patient in the Iowa individual market almost put that market out of existence, giving rise in 2018 to a reinsurance element in the risk adjustment system where every state’s small employer and individual markets now has some protections against the damage high-cost claimants can cause not only to a single insurer, but to market sustainability as a whole.
There will most likely be future sessions on regulatory topics, as attendees were clearly interested and intrigued about the content of our course and asked many great follow-up questions.
I strongly encourage SOA members to get involved in volunteering for our profession, whether through the sections, podcasts, exams, meetings, or LEARN. There is so much you can share with others to support our industry, and one another as well.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Kristi M. Bohn, FSA, MAAA, is vice president, Healthcare Excess at RGA. She is a co-editor of Group Insurance, 6th through 8th editions, and an active exam and health section volunteer for the Society of Actuaries. She served as the chief health actuary for the State of Minnesota from 2014 through 2019. She can be reached at kristi.bohn@rgare.com.