The US health insurance industry remains well-capitalized, with clear correlations between higher credit ratings and less volatility and more favorable returns on revenue and equity, according to a new report from rating agency AM Best.
In the latest Best’s Special Report, AM Best used a variety of benchmarking techniques to compare absolute results and volatility levels across the health insurance industry. The primary quantitative tool used to evaluate balance-sheet strength was Best’s Capital Adequacy Ratio (BCAR), which helps determine a company’s capitalization.
According to the report, although 54% of rating units had a BCAR assessment at the strongest level, only 23% of those units had balance sheets also assessed as strongest. However, nearly 80% of health insurer rating units had a balance-sheet strength assessment of strong or better.
Surplus volatility was more pronounced with lower assessment categories, according to AM Best. When measuring companies’ largest one-year decline of surplus over the past 10 years, AM Best found that rating units with balance sheets assessed as strongest lost 5.5% of capital, while those assessed as adequate or weak/very weak lost capital of 41.6% and 34.5%, respectively.
Along with balance-sheet strength, the key factors AM Best used in its credit analysis were operating performance, business profile and enterprise risk management. Operating performance, in particular, is a key indicator of future balance-sheet strength and long-term financial stability. AM Best also assessed trends on operating return on equity and pre-tax return on revenue and their relative impact on operating performance assessment categories. Higher returns on equity and revenue, favorable loss ratios and stable operations were all key drivers of more favorable operating performance assessments, AM Best said.
The rating agency said those metrics were especially important given the COVID-19 pandemic’s effect on the deferral of care and morbidity risk. Risks also included pent-up demand for delayed medical procedures and visits, along with the potential for higher morbidity due to a lack of treatment – which could result in worsening or undiagnosed conditions.