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Five Ways a Morbidity Predictive Model Can Relieve Medicare Supplement Market Pressures

by Sue Bartholf, FSA, MAAA

The Medicare Supplement category has seen a “silver rush” as Baby Boomers hit 65 and new carriers flood most state markets. But there’s a catch for carriers: Sustainable profitability may hinge on the smart use of insurtech, specifically a predictive model for morbidity.

Because products are strictly regulated, new carriers have little option but to compete on price. In a survey of the Medicare Supplement markets in 32 populous states, Gen Re found that premiums fell every year from 2015 through 2019, even as claims costs increased. Unsurprisingly, loss ratios went up between 2014 and 2019, especially on new business.

Loss ratios fell in 2020, but only temporarily. If you’re a carrier in this market you already know it’s headed back to “business as usual” marked by these five challenges:

  • A decreasing proportion of underwritten business
  • Heightened competition
  • Increased rate compression
  • Higher loss ratios
  • Rising decline rates

A buyers’ market is fine for applicants. But for carriers, those trendlines are going in the wrong direction. Irix® – Risk Score can help to ease each of those problems; as the only in-market, proven predictive model for morbidity, it may well make the difference between accepting the status quo or fearlessly embracing disruption and striding in to take your share of the market.

Here’s a look at five ways predictive modeling eases pressure on carriers competing in this tough market.

1. Get the most out of your underwritten business

The Baby Boom is defined as 1946 to 1964 in the United States.

Figures from the Centers for Disease Control and Prevention (CDC) show a steady increase in births over most of that 18-year period, peaking at nearly 4.3 million births in 1961. So, the wave of people taking advantage of open enrollment in Medicare Supplement plans may not even have crested.

Demographic pressure on underwritten business is compounded by regulatory pressure in California, Connecticut, Missouri, New York, Oregon, and Vermont, as well as new rules emerging in Idaho, Illinois, and Nevada. Those states all mandate annual open enrollment periods or guaranteed issue for all applicants, not just those aging in.

That means the share of underwritten business—one of the few areas where carriers can eke out a competitive advantage—may fall even further and stay low for some time. Risk Score effectively stratifies risk within medical conditions to help you find individuals who can be insured but whom you might otherwise have overlooked.

2. Find healthy customers (and sign them quickly!)

Although the top five carriers still account for most of the market, about 200 carriers were active last year. Populous states have seen many new carriers enter the market with lower and lower pricing. In most states the lowest-priced carrier in 2018 is not even among the 10 lowest today.

New low-priced carriers attract new entrants aging in. The rapid drop in premiums at the low end of the market has also created a slow-rolling shock lapse as those customers who can be underwritten leave for lower premiums. Established books are thus left with higher-morbidity customers. In self-defense, some major carriers have created their own low-price spinoffs.

In this very dynamic situation, carriers can justify low rates if they can select risks more effectively. Higher profitability from underwritten lives can offset lower profitability from non-underwritten ones and help you price to minimize lapse rates while remaining sustainable.

Risk Score also minimizes the number of applicants who need to be reviewed by an underwriter and maximizes the number who can get a point-of-sale decision. As a carrier, you know that more reviews equate to higher risk of abandonment—not just because customers lose interest but also because brokers actively want to get customers off the market. They will shop their applicant around rather than go into review, or while they’re being reviewed.

3. Get relief from rate compression

Low-priced competition is driving premiums down toward a floor determined by the scale of losses carriers are willing to endure for the first few years. This has resulted in increased rate compression and created a business environment in which operating efficiency is especially important.

Using Risk Score can lead to an overall underwriting gain through the selection of lower-risk lives and reductions in overhead through reviewing fewer cases. Carriers can thus price more competitively or price to the market and sustain competition longer.

4. See two ways around rising loss ratios

“Launching a Medicare Supplement product with loss ratios in the 80s and 90s in the first three years is an exceedingly difficult way to start a program and produces a long and possibly impossible path back to overall profitability.”–Andy Baillargeon, Gen Re, “The Incredible Shrinking Medicare Supplement Rate,” September 2020

The first half of 2020 bucked recent claims trends. Some healthcare facilities delayed or canceled elective treatments because of the pandemic; many patients opted to forgo nonurgent care to limit their risk and exposure. And the pandemic measurably impacted mortality in the Medicare-eligible population. The net effect of those and other factors was that overall claims were somewhat lower in 2020 than in 2019. However, spending rebounded through the second half of the year; as Boomers continue to age, care costs will increase. Indeed, much of the claims dip seen in 2020 may be made up relatively quickly. Some foresee higher claims for conditions that were ignored and worsened during the pandemic, and additional claims related to long COVID.

Risk Score can take some of this pressure off; you can write more business at any given loss ratio or write the same amount of business at a lower loss ratio.

5. More data = less fear

Historically, the insurance industry’s first response to rising loss ratios is to tighten underwriting guidelines. But traditional condition-based underwriting is a blunt instrument. Risk Score allows carriers to identify high-risk lives more accurately. This is especially true when different types of data, such Medical Data, are used in concert with the model. This brings in synergy from the fact that one type of data often identifies high-risk lives that another does not.

Embrace disruption or be disrupted

Except for COVID-19 in 2020, the broad forces shaping the Medicare Supplement insurance market are unlikely to change any time soon.

Those forces ensure that an accurate predictive model for morbidity is disruptive—and there’s only one proven product in the market: Irix – Risk Score. It enables you to mitigate rate compression and loss ratios while gaining or maintaining market share. When you consider the rate compression and loss ratio squeeze that characterizes this market, the choice may come down to this: Either embrace this essential insurtech or be disrupted.

Sue Bartholf, FSA, MAAA

Director and Product Actuary at Milliman IntelliScript