Volatility Solutions
Health Volatility Solutions
Excess of loss reinsurance is an annually renewable cover that a ceding company may use as part of their risk management strategy to limit exposure and provide volatility protection to earnings.
Employer Stop Loss (ESL)
For self‐funded employer plans.
Provider Excess (PXS)
For health systems contracted with two‐way risk (ACOs - accountable care organizations).
Medical Excess of Loss (XOL)
For small or midsize health insurance companies. Larger health plans may still keep medical excess reinsurance at a high attachment on their ESL block to maintain strategic reinsurance partnerships and ancillary services.
Pays when total claims during a stated period (usually 12 months), exceed the agg attachment point (percentage of expected underlying risk claims).
Agg attachment is usually set at a level where agg claims rarely occur.
Pays when claims on an individual member during a stated period (12/12, 12/15, 12/18, 12/24, 24/12; depending on claim run-out and run-in periods) exceed the spec attachment point.
Spec purchasers can expect to pay more in premium than they receive in claims 4 out of 5 years so the goal should be to set the attachment point at the high end of the organization’s risk tolerance.
Structural options to increase retention while maintaining downside protection and strategic partnerships
Premium Refund / Profit Commission
The simplest, but not always most optimal, is for the reinsurer to share a percent of reinsurance profit after reducing for the reinsurer’s risk margin and expenses. This will provide the most savings at the lowest loss ratios, but not necessarily at the more likely expected range of loss ratios.
Swing Rate
In this case a lower rate is provided until reinsurance claims exceed a defined loss ratio, at which point the rate will increase as reinsurance claims increase until reaching a maximum rate at an upper end defined loss ratio. This can provide greater savings in the more likely expected range of loss ratios but also higher cost at the upper end loss ratios.
Aggregating Specific Deductible
This is essentially a second deductible – an agg deductible in excess of the spec deductible. The amount exceeding the spec attachment point is first applied to the aggregating specific deductible before the reinsurer pays claims. This can be considered as an alternative option to simply increasing retention on the spec attachment.