Spreading healthcare exposure across capital markets

Health insurers are increasingly using risk-spreading tools to transfer exposure to the capital markets. A recent SNL Financial article reports that Aetna has agreed to an insurance-linked securities deal that will provide the company reinsurance protection.

Aetna Inc. is sponsoring Vitality Re VI Ltd. (Series 2015-1) in an insurance-linked securities deal that will give the insurer at least $200 million of protection on a reinsurance basis against sudden increases in health insurance medical benefit claims, Artemis reported Jan. 9.

…Under the new deal, Vitality Re VI will offer two tranches of series 2015-1 health insurance medical benefit risk-linked notes to investors. The preliminary size of the class A tranche is $140 million, while the preliminary size of the class B tranche is $60 million. Both tranches are linked to the insurer’s medical benefit ratio as a trigger, according to the report. The deal will provide Aetna coverage for three years, from 2015 through 2017.

…Milliman Inc. is providing the risk modeling and calculation agent services, Artemis said.

This article, co-authored by Milliman’s John Cookson and Hannover Re’s Keith Kennerly, offers perspective on how risk-spreading tools such as catastrophe bonds can help health organizations control their claims exposure. Here is an excerpt:

Risk-spreading tools that make use of the capital markets can help ACOs and other organizations, both large and small, mitigate the aggregate population risks. Given the trend spikes and volatility inherent to health risks, these capital structures would rely on a combination of transparency, predictive analytics, and specially-designed indices to provide insight into the actuarial risk and actuarial underwriting opportunity.

By providing a heightened degree of visibility into the underlying actuarial risks, organizations can have a higher comfort level in underwriting those exposures at much lower attachment points that are very close to current Medical Loss Ratios (MLR). This could also set the stage for transforming a large portion of healthcare spending from a cost into a tradable asset (investment opportunity) for capital markets participants/investors.

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