Medicare Supplement Rate Increases - No One Knows What They Don’t Know
Congratulations! You’ve completed your rate development work on your brand new Medicare Supplement product; your rates have been approved with each of the states in your market, and those rates are on the street being sold right now! There is nothing to do now except wait until it’s time for the first round of rate increases next year...right?
Wrong, of course. You‘ll have some very important decisions to make regarding those rate increases, and you will want to be as educated as you can be about your new block of Med Supp business when that time comes - and that decision time will come upon you quickly, while the time frame over which rate actions actually take effect will be agonizingly slow.
The exhibit below gives a sense of what the timeline is for rate increases - from the point that you collect the data to the time that rate increases become effective.
Don’t get off to a bad start. Inadequate rate increases during the early stages of a new Med Supp offering can quickly erode all of the hard work you put into the initial rate development. And it can take a long time to recover.
Developing excellent data structure and quality for tracking and experience analysis should be your first focus. Once your data structure is in order, understanding the actual business mix being written, as compared to what was assumed in pricing, will be critical to establishing a correct first year rate increase.
One of the most important assumptions in that initial pricing is likely to be the expected mix of Underwritten business (UW) versus Open Enrollment and Guaranteed Issue (OE/GI) business. Loss ratios can be 20 or more points better for UW business versus OE/GI. If the mix of business emerges differently than you priced, then loss ratio results will almost definitely follow suit.
Let’s look at a quick example. Suppose in your pricing you targeted 60% underwritten business with an expected loss ratio of 55%, and 40% OE/GI business with an expected loss ratio of 80%. This blends to an overall expected loss ratio of 65%. But if the true business mix emerges at a 50-50 mix instead, the expected loss ratio jumps to 67.5%, all other things equal. And if it flips all the way to 40% UW and 60% OE/GI, then the expected loss ratio increases to 70%.
At the time you are making your first round of rate increase decisions, these potential issues may not be entirely apparent in your newly developing experience. After nine or ten months of sales (i.e., decision time for your first set of rate increases), experience data is likely to be insufficient or inconclusive for rate increase purposes. Only a few months of data have fully run out, so there is a significant IBNR component. And since policies are being written continuously during that period, many of those policies have virtually no experience yet. In addition, seasonality can be a major factor over a short period.
With no real experience data on which to base your decisions, but in an effort to grow sales, you may be tempted to go with a first round of rate increases less than trend. Understanding early trends in your business mix can help prevent you from making key early business decisions that you could regret when experience fully emerges.