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Dialysis centers, insurers clash over contributions for kidney care coverage

2018 US Property Casualty Insurance Market Report

Fintech

Fintech Funding Flows To Insurtech In February

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did


Dialysis centers, insurers clash over contributions for kidney care coverage

U.S. dialysis centers support a foundation that helps people with kidney disease pay for private health insurance. The companies say they donate money so patients can get the treatment they need.

But insurance companies and other healthcare groups say the dialysis industry has a more self-serving motive: profit.

Helping kidney failure patients obtain commercial insurance means the dialysis centers can get paid 4x more than they would if the patients were covered by the government-run Medicare insurance program, the agency that runs Medicare estimated when it examined the practice in 2016.

Now, the debate over the payments is coming to a head nationally and in California's legislature as opponents try to put an end to a practice they say raises insurance costs for everyone and hurts kidney patients as well.

A number of healthcare organizations including America's Health Insurance Plans, or AHIP, an industry group representing companies such as Anthem Inc., Cigna Corp. and Centene Corp., wrote to Health and Human Services Secretary Alex Azar on April 17 asking the Centers for Medicare and Medicaid Services, or CMS, to again try to pass rules discouraging the practice. A previous attempt by the agency was blocked by the courts in 2017.

Meanwhile, California state lawmakers are considering taking action. A bill aimed at deterring such donations passed the state Senate's health committee April 28.

High stakes for dialysis providers

To insurers and other opponents, the donations to help end-stage renal disease patients pay premiums is an attempt to game the system. Getting more patients to have higher-paying private insurance "generates significant profit for dialysis providers engaged in these schemes," wrote AHIP and the other groups, including the Service Employees International Union, the ERISA Industry Committee, the progressive advocacy group Families USA, and the National Association of Health Underwriters.

Indeed, the debate represents high stakes for major dialysis center chains like DaVita Inc., which operates or supports 2,510 outpatient dialysis centers in the U.S.

A JPMorgan North America Equity Research note to investors April 17 said DaVita derives nearly 60% of its earnings per share from subsidized patients, although the analysts acknowledged the company puts its exposure at 10% to 25%.

In its own letter to Azar on April 18, The Kidney Care Council, an industry group representing the dialysis centers, said insurers are the ones looking out for their profits.

Insurers do not want costly kidney failure patients to get help buying policies because the companies do not want to cover their treatment.

The attacks on the contributions are a "thinly veiled attempt to remove patients and employees with chronic conditions from private coverage and push them onto government programs," The Kidney Care Council wrote.

Medicare agency's attempt at rules

CMS, under the Obama administration, had expressed so much concern over the practice in December 2016 that it sidestepped normal procedures to create expedited rules, including a requirement that insurers be told when donations were being used to help pay for premiums.

Dialysis groups said that would enable insurers to not accept the donations, essentially allowing them to stop patients they did not want to cover from being able to afford insurance.

U.S. District Court Judge Amos Mazzant in the Eastern District of Texas on Jan. 27 agreed with dialysis centers that CMS violated procedures and granted an injunction blocking the rules from taking effect.

Now AHIP and other groups want CMS to try imposing the rules again while following procedures to avoid another legal challenge.

It is unknown whether CMS, under the Trump administration, will take action.

"CMS has been quiet on the issue so far but the pressure may force them to do something," Cowen Washington Research Group analyst Rick Weissenstein wrote in an April 18 policy note about the debate.

In trying to stem the practice, CMS said the loans could actually hurt patients, including making it more difficult to be approved for kidney transplants.

Transplant centers have to assess whether patients will have continuous healthcare coverage for follow up treatment. However, some of the donations "will not continue to provide financial assistance once a patient receives a successful kidney transplant," CMS said.

74,000 patients

The American Kidney Fund, a nonprofit funded partially by dialysis centers, and the Kidney Care Council, meanwhile, deny any scheme to enrich providers.

The fund, in its letter to Azar on April 18, said it helped 74,000 people get treatments, including transplants, last year.

While Medicare is generally for older Americans, it covers people of all ages with end-stage renal disease if they meet several conditions like needing dialysis, being eligible for Social Security or being the child of a person who is eligible, according to Medicare.org. With each case, Medicare could cover part or all the costs of inpatient or outpatient dialysis, kidney transplants and other services like lab tests, according to the website.

However, the government insurance program does not cover prescription drugs or long-term care, and patients often need to buy private insurance or a Medicare supplement, or Medigap plan, for those costs.

And in 23 states, including California, kidney failure patients cannot get Medigap and are responsible for 20% of costs with no cost-sharing maximum.

Rather than discouraging people from going on Medicare, the fund said it tries to fill the gaps. More than 60% of the grants go to help people pay Medicare and Medigap premiums, the fund said.

Medicare, though, does not work for about 12% of its grant recipients, so the fund helps them buy commercial insurance, the group said.

Meanwhile, the California bill sponsored by Democratic state Sen. Connie Leyva would require anyone making the donations to certify the patients do not qualify for Medicare.

The Kidney Fund, however, wrote in an April 11 op-ed in the Capitol Weekly, a California political news site, that disqualifying people eligible for Medicare from getting the premium help would "cause profound harm to many California kidney patients."


Insurance
2018 US Property Casualty Insurance Market Report

Highlights

S&P Global Market Intelligence’s 2018 US Property & Casualty Insurance Market Report offers a five-year outlook for the P&C sector, which should return to underwriting profitability for the first time since 2015.

Oct. 26 2018 — The federal tax reform President Donald Trump signed into law in December 2017 should help provide for an extended period of P&C industry profitability in 2018 and beyond as companies benefit from the lower corporate tax rate, but the impact is not limited to after-tax profitability. Actions by several prominent European-headquartered insurers to change the way certain of their U.S. business is reinsured materially impacted premium growth rates in the first quarter of 2018 and are likely to affect full-year results.

1 quarter does not a trend make

Historically strong results for the State Farm group in the first quarter
helped drive favorable comparisons in several key measures of underwriting profitability. To the extent the improvement continues for State Farm — the industry’s largest group based on direct premiums written — it could provide an additional tailwind for 2018 and beyond.

While there is a risk of recency bias in reading too much into a single quarter’s worth of data, the industry was already positioned for improved underwriting results in 2018. The second half of 2017 saw elevated catastrophe losses as the United States was hit by three landfall-making hurricanes and an unusual spate of fourth-quarter wildfires in California. Projected results for 2018 and subsequent years, all of which show combined ratios of less than 2017’s total of 103.5%, assume a normal catastrophe load.

Auto repairs in progress

Competition will remain intense in certain non-auto business lines given ample reinsurance capacity, high levels of industry capitalization and a macroeconomic environment that remains characterized by relatively slow growth in gross domestic product. Though modestly higher business volume driven by that economic expansion will help offset downward pressure on premiums, the industry will be challenged to achieve profitable top-line growth.

Trends in litigation will increasingly weigh on underwriting results in several business lines, including professional lines and the Florida homeowners business. They also could lead to greater demand for coverage, particularly for new and emerging risks.

The macro view

A rising federal funds rate and 10-year Treasury yields that have reached seven-year highs bode well for an industry that has long been suffering from low interest rates. And the relief cannot come quickly enough after the industry’s net yield on invested assets slipped to a new low of only 3.03% in 2017. Though projected results provide for increasing yields from that floor, the improvement will still take place gradually and is unlikely in and of itself to materially impact how companies are underwriting business

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Property & Casualty Insurance Market Report.

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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U.S. Insurance Market Report – Property & Casualty (June 2017)

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Fintech
Fintech Funding Flows To Insurtech In February

Mar. 21 2018 — Insurance technology companies took center stage in the month of February, attracting the most investor dollars of the various financial technology subsectors that S&P Global Market Intelligence tracks. Overall funding in the financial technology sector declined about 10% from the prior month, however, based on the disclosed value of deals involving private U.S.-based companies that closed in each period.

Two health-insurance-focused startups were key drivers of the $216 million that flowed into insurtech. These were CollectiveHealth and Bind Benefits, which closed on $110 million and $60 million funding rounds, respectively. Both provide tech solutions to companies that self-insure (i.e. provide health coverage for their employees with their own money rather than using an outside insurance company.)

This was a departure from last month, when investment and capital markets technology was the most well-funded, bolstered by capital raises from several robo-advisors, including Wealthfront and Acorns. Meanwhile, insurance technology companies only closed on $71.3 million worth of transactions during the month.

Already a client? Access more data and insights from the full report here.

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Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

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Insurance
Lemonade Growing Premiums Faster Than Esurance's Homeowners Business Did

Feb. 28 2018 — Insurtech startup Lemonade Insurance Co. is demonstrating impressive growth when viewed in the context of Esurance Insurance Co., which was in the vanguard of selling insurance online when it was founded in the late 1990s.

Esurance began writing renters and homeowners insurance more than a decade after its founding. It grew renters and homeowners policies quickly, going from about $9,000 in direct premiums written in the third quarter of 2012 to $25.5 million in the third quarter of 2017. Lemonade, by contrast, hit the $2.5 million mark in five quarters, as opposed to eight for Esurance.

Lemonade premium growing faster than Esurance's reters/homeowners business at same age

While Esurance had already made inroads in auto, renters and homeowners insurance were new territory back in 2012. It began selling renters insurance in five states that year, added homeowners policies in the following yea, and continued to expand both lines over the succeeding years. This data comes from filings submitted to the National Association of Insurance Commissioners. Insurers report only "homeowners" premiums in these filings, but the category is broader than that. It also includes renters insurance.

But there are also differences between Lemonade and Esurance. Since Esurance sells auto insurance, it offers discounts on homeowners insurance to customers that bundle, which Lemonade cannot do. Esurance is also owned by Allstate Corp., a relationship that offers vast capital resources but, at the same time, means that Esurance does not have the same autonomy that a startup like Lemonade possesses.

While Esurance might not have grown its homeowners business as quickly, it bested Lemonade in another area: loss ratios. On average, its loss ratio was about 70% in its first five quarters of operation, versus 102% for Lemonade. The first quarter of 2017 was particularly rough for Lemonade, when it recorded a loss ratio of 241%. The company acknowledges these struggles, writing in a January 23 blog post that underwriting was "pretty shoddy" in the early days. But with the influx of more data, its underwriting models have improved, Lemonade wrote.

Geography

In terms of where they write business, the two companies took different paths. Whereas New York was the first state where Lemonade wrote, it is still not a major area of focus for Esurance. Esurance does not write renters business in New York (only homeowners), and in 2016 the state made up less than 1% of its total homeowners direct premiums written. Esurance began with several Midwest states — Illinois, Missouri, Ohio, and Wisconsin — and has not specifically gone after states with large metropolitan areas like Lemonade has. For instance, Esurance has avoided California whereas Lemonade quickly expanded into the Golden State. In the third quarter of 2017, Lemonade wrote 1.7x as many premiums in California as it did in New York.

California eclipsing New York as source of Lemonade Insurance Co.'s direct premiums written ($M)

California is a larger market, however. Insurers wrote about $7.70 billion in direct homeowners premium there in 2016, versus $5.25 billion for New York. State Farm Mutual Automobile Insurance Co. was the leader in California, with about 19.5% of the market, while Allstate captured the most market share in New York, with 14.4%. State Farm was not far behind Allstate in New York, though, with 13.8% of the market.

While fourth-quarter 2017 statutory data is not yet available, we know that Lemonade entered Nevada, Ohio and Rhode Island in October and November, based on the company's website. Lemonade has notably avoided Florida, which is not only the largest homeowners insurance market in the U.S., but also has a high average premium relative to the number of households there.

Other startups have also been taking their time before entering the Sunshine State. As Swyfft LLC CEO Sean Maher explained, coastal states require a significant amount of expertise. But his company plans to do business there soon, shooting for a June launch.

Competition

As Swyfft shows, Lemonade has some competition from other insurtech startups. Hippo Analytics Inc. and Kin Insurance Inc. are other examples, though they do not also write renters business like Lemonade does. Meanwhile, there are a handful of companies that offer renters insurance, but not homeowners insurance. These companies write in more states, which makes sense given that it takes much more volume to achieve the same amount of revenue from renters insurance that one would receive from homeowners insurance. On average, annual U.S. renters premiums were only about one sixth of U.S. homeowners premiums in 2015, based on data available from The Insurance Information Institute, an industry association.

u-s-insurtech-companies

We estimate the potential renters insurance market in the U.S. is about $8 billion in size. By our calculations, California was the largest market for renters insurance, at roughly $1.2 billion, followed by Texas with about $854.4 million and New York with $720.4 million.

Esurance can be a case study for the renters insurance market as well. It offered renters insurance in more than 20 states as of the end of 2016, though there were only three where it offered renters but not homeowners coverage: Arkansas, Louisiana, and West Virginia. They illustrate how much less the renters insurance line produces in terms of premium. In 2016, it only generated $423,000 in combined premium from those states.

Selling renters and homeowners insurance online is not a new concept, but companies like Lemonade seem to be putting a new spin on it. Lemonade has added more innovations — such as a chat bot named Maya — and has streamlined the process, which appears to be winning over customers. Whether it can achieve this growth while also turning a profit, though, remains to be seen.

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