Let's Get Specific With Hobson Carroll
Hobson Carroll is back on the podcast today! Hobson is a world-class actuary and we are sitting down to talk about specific deductibles.
We are going to dig into setting the deductible - what types of deductibles we can utilize to mitigate risks and price them appropriately. We may even get a whiteboard session to get really specific on specifics.
As Hobson notes, for a lot of people in today's world, the specific seems to be the most important thing, because everyone realizes that individuals have large claims, and we don't want $2 million claims hitting the budget of the employer self-insured plan.
But if you go back to earlier times when claims didn't get so big and stop-loss insurance for self-insured plans was just sort of starting out - it existed in one form or another before that, but it was generally had different names.
In reality, in the early days, it was referred to as individual excess risk insurance. And of course, the aggregate protection was known as the aggregate excess risk insurance, excess risk being the term used to describe what happens to the claims over a certain amount.
If you’ve ever had any questions on specifics and how to utilize them appropriately, stay tuned as we delve into specifics of the specific deductible.
Press play above to dive into the full episode!
- Additional Resources
Hobson: 00:00 You know, we don't want $2 million claims hitting the budget of the employer self-insured plan. So, but if you go back to earlier times when claims didn't get so big and stop-loss insurance for self-insured plans was just sort of starting out after Arista was passed. I mean it existed in one form or another before that, but it was generally referred to and this gets into something which is very important in any discussion involving the self-insured world. And that is nomenclature.
John: 00:37 Guys, welcome to the show. We are talking about "Let's Get Specific" today. We have none other than my good friend Hobson Carroll, a world-class actuary from Intrust, talking about the specific deductible. Setting the deductible is one of the appropriate, what type of deductibles can we utilize to mitigate risks and price them appropriately. So welcome to show Hobson.
Hobson: 01:02 No welcome to the Houston area. John heavy here.
John: 01:06 H town Houston playing tomorrow night. We'll sit tonight world series. All right, so let's get into, why don't you just talk about the specific deductible and where it originated from. We've got the specific, we've got the aggregate. Let's talk about specific, yeah.
Hobson: 01:23 Well for a lot of people in today's world, the specific, it seems to be the most important thing because everyone realizes that individuals have large claims and you know, we don't want $2 million claims hitting the budget of the employer self-insured plan. So, but if you go back to earlier times when claims didn't get so big and stop-loss insurance for self-insured plans was just sort of starting out after Arista was passed. I mean it existed in one form or another before that, but it was generally referred to. And this gets into something which is very important in any discussion involving the self-insured world. And that is nomenclature. In reality, in the early days it was referred to as individual excess risk insurance. And of course, the aggregate protection which is aggregated is was known as the aggregate excess risk insurance, excess risk being the term used to describe what happens to the claims over a certain amount.
John: 02:21 They also call it catastrophic coverage, blah, blah.
Hobson: 02:25 That's true too. It can be, but that's rarely used as employers think of it as well. It protects against the catastrophic losses from an individual impact in their plan. Absolutely. However, the policy form that the stop-loss carrier uses invariably uses the expression specific stop-loss insurance or individual excess risk insurance or individual stop-loss insurance. These terms are all basically interchangeable as long as we understand what the concept is, which has to do with the fact that let's take a, an employer says, well, I'm going to self insure my health insurance benefits for my employees rather than turn a premium over to a carrier every month and it's their responsibility to take care of the claims for the employees. The employer says, I'm going to be the insurer under Arista. I become the self-insure, if you will. And I look and I say, I've got a pot where my employees are going to and their independence, they're going to pour all their claims.
Hobson: 03:23 Okay. And I need that pot to be protected because it can't get too big or I'll be spending too much money. So, they use risk mitigation tools. Okay. If I can use that expression to protect how that pot can accumulate and get to if that pot gets too big and overflows, the employer goes, man, I lost a lot of money compared to what I was expecting to pay. So they do, they use two major tools for that. One is, he says, I don't want the claims on any one individual to S you know, to blow my budget for the whole year. I mean, if something happens in the first year, I mean the first month of my year and I have an individual in a car accident or I have a premature baby or I have someone that's born with a hemophilia and I've got to pay for that drug for the rest of the year.
Hobson: 04:07 I know right away I'm using a big chunk of what I thought my expected claims or my budget was. Okay. So I buy an individual stop-loss policy, a policy that stops the losses on any one individual during that [inaudible] not per employee. Right. Well, in the early days it was almost per employee, but you are? Yes. Okay. Per person, sorry. Yes, individual. Okay. And in addition to that, the employer often not always, but often says, I still want to protect the pot in case it overflows from too many claims that are below the specific attachment point or specific deductible. That point where I want to protect the claims for individual catastrophic for me. Give me an example. Well, I'll say let's say I buy a specific stop-loss insurance attachment point or deductible at $50,000 per person per the calendar year or the period of time, the plan year.
Hobson: 05:04 So what that does is bifurcate all claims into two mutually exclusive and mutually complimentary sets. Okay. That ends up totaling the total claims. Those claims that are up to the specific deductible of $50,000 and all the claims that exceed $50,000. Now, when I say exceeds $50,000 I mean amounts in excess of the 50,000 point. I don't count the first 50 with that. The first 50 goes into the first pot, right? The claims up to 50 and then if it's, that's 50 thousands and first dollar, that next dollar goes to the specific pot. Okay. But anyway, all claims will fall into one of those two subsets, right? And you add them together and you've got your total claims that you're going to have for the year. But for that stuff that's all below, which is where most of claims are going to be, obviously below the specific deductible.
Hobson: 06:00 I mean, in almost every imaginable situation, you may still want to purchase a protection against that total pot. And that's where the aggregate, which is, that means you aggregate all of the claims from the individuals on a certain time under 50,000 in this case. And you throw them into the pot while the employer may still want him either. You know, there could be an epidemic of a really bad flu and you could have a half a dozen people who hit $50,000 because it was really, really hard to deal with it. And he may blow his budget for the aggregate anyway. Well, so he may buy and say, look, I'm willing to go on the risk for so much money and maybe another 20 or 25% but I'm not willing to go more than that. So that's where the aggregate kind of strong. The point is you use those two tools to really hone down and protect your total spin for the year. What your total spend is going to be.
John: 06:52 Now you said most claims fall under the specific, is there a number that we know that typically this percentage of members are gonna breach to specific and it's going to equate to X amount of claims?
Hobson: 07:04 Well, yeah, I mean actuarial tables are plenty of actuarial manuals rating manuals around that.
John: 07:12 A Hobson wrote one of the stop-loss manuals that they use to approach underwriting side. No,
Hobson: 07:18 That was a bit of time ago, but I'm still familiar with what's around now. And the point is it usually includes information relating to what the frequency expectation is and the dollar amount above that level for every, every dollar amount you can think of. So a $5,000, $10,000, $20,000, $50,000, it'll tell you what the percentage is. Now, any given group is going to vary from, you know, a global average
John: 07:45 Based off of the spec [inaudible].
Hobson: 07:48 These tables are used to generate the expected claims on a manual basis for the specific risk at any given that was updated. Oh, most of the major actuarial houses update those annually in the cost of care. Yeah. Now, you know, a lot of under, that doesn't mean that stop-loss underwriters necessarily update their manuals every year because they include a trend factor that takes into consideration the increase in claims costs over time. So they may go one or two or three years before they update their manual, and then they just tweak the result, the actuarial manuals, or they attempt to be as accurate as they can for the time period that they release released their manual. And the underwriting process uses both the specific information about a group such as their age and sex and where they are, their demographics, because claims costs vary by location, et cetera. So that's all taken to consideration in conjunction with the manual to come up with the expected claims, if you will, that will fall into that specific part of the total claims cost. Okay. How do we go about setting
John: 08:56 The specific? When you look at it actuarily we've got a group, let's say it's a hundred lives. How do you go about setting that specific?
Hobson: 09:04 Well, there's a lot of variation in the thinking about this. You'll see ranges from, it can range quite a bit. It depends somewhat on the risk appetite of the employer sponsor of the plan, but as a general rule, underwriters are comfortable with a range that's anywhere from five to 15% of the total expected claims that they want. They have for that group. So the estimate, the total picture of what they think the claims are going to be.
John: 09:34 Wait, I saw Hunter person $1 million they want to spec, but from 50 to a hundred
Hobson: 09:38 Typically privacy. Yeah, that you're going to and you're going to see that a lot. That doesn't mean that there won't be situations where you see 25 and you may see 200 because that million dollars of expected total claims can range quite a bit depending on the age and sex and demographics, the plan of benefits, et cetera of and the networks it's being used. All of those things go into factors. Yeah.
John: 10:00 And if I'm a, if I'm a consultant and I'm looking to provide options to my clients, what should I be looking at? How many different specific deductibles, how should I analyze it from a consultant standpoint?
Hobson: 10:13 Well there you kinda like need to understand the basic theory and understand how the interrelationship between the specific and the aggregate and the specific deductible level and the premiums that are going to be charged for it. How those are connected. And for that I'm, I'd like to take it up to the whiteboard.
John: 10:30 We're going there ready? Is that, is that the aggravating specific or no, that's just setting specific. All right. Did a whiteboard.
Hobson: 10:38 So what I'm showing here is just a basic simplified picture of what's going on with the self insured plan. Again, the self insured plan is this big pot, right? And the employer says to his employees and their dependents, bring all your claims and form into this pot and I'm going to take care of it. Okay? And then the employer looks and says, eh, you know that pot could get pretty big, right? It could overflow. I've only got a pot this big that I want to spend the money on. And if the claims go over that, and I'm going to, I'm going to be out a lot. So I buy aggregate stop-loss insurance, which says, okay, if the claims exceed this point, I pay a premium to an insurance company to pay the amount that overflows that point. Okay, that's aggregate stop-loss insurance. But if I have one person who has $1 million claim, you know, that could fill half the pot up depending on what the size of my group is and that might endanger the aggregate.
Hobson: 11:36 So I say, well, I don't want to have that happen either. So I buy individual stop-loss insurance, right? Or specific stop-loss insurance. Now here's a picture of all the people in the plan, right? And here's the specific deductible. I've just drawn a line. I haven't put a dollar amount to it. It could be $50,000 could be $25,000 it could be $100,000 right? But what we look at is the actual claims that every one of the our people, our little stick people have. Okay. Obviously anything that is below this line, the cutoff right for the specific deductible comes over here and gets dumped in our pot, our aggregate pot, okay, I've got a person here who went above the specific deductible. So this much or the amount up to this specific deductible, we'll go over here into this spot. $50,000 call it $50,000 okay, so let's say that's $50,000 let's call it $50K, that's supposed to be a five and that's supposed to be a K. Okay, so up to $50,000 including the first $50,000 the claims come over into this pot, but the amount in excess, and let's suppose this one was, this was a $75,000 claim.
Hobson: 12:47 75 K. Okay, so that $25,000 which represents the difference here, right? It would be thrown into another pot. Remember I said there's two subsets that make up the total, the aggregate claims and then the claims that go towards the specific, that's what this little pot is that we're going to pour all the claims that are above the line, right? We're going to put them in here. And what the, what the employer does is pay an insurance company a premium, right? To cover all the claims in that pot. And that's the specific deductible and this specific stop-loss insurance. So they pay a specific premium to a carrier to take that catastrophic risk. Okay? They pay a premium for that over here, they're funding all these claims, but they pay a premium in case the claims overflow. And that's the aggregate premium. The aggregate premium is not usually very much, not under normal circumstances.
Hobson: 13:45 Okay? But this can be a lot. This depends on the level of the specific deductible, the risk involved, that plan, how rich the plan is and et cetera. So see here we have another one. We had a big one. We had like let's say a $200,000 claim, so $150,000 is going to come down here. The first 50 goes where? Back over here, so we've accounted for every claim that that employer had and one of these two pots. Okay. Is the reason for that? All right. Obviously the more claims that we exp, if we lower this line, make the deductible lower, right? That means we logically assume there will be more claims that exceed that line on average and for a manual, let's say, I'm not talking about the actual claims of a given group of what you would expect for a book of business. That means this little pot gets bigger in size in terms of what we expect. The bigger that pot is on an expected basis, the more premium we're going to pay. Okay. Symbol relationship, lower the specific deductible premium for that goes up. Raise the more insurance space. That's right. Raise the specific deductible and you expect less claims to be in excess of the line. This little pot gets smaller, it costs less.
John: 15:09 So I'm coming up on renewal. I've got a $50,000 spec, I've got, you know, two people that one person that breached a spec the year before. I'm looking at, and you can go into your opinion. I'll give my opinion on it. I'm looking at a specific deductible $60,000 this year and saying okay, how do we determine whether we should go to 60 or not? In your opinion?
Hobson: 15:35 Well all things being equal for a book of business, okay. The premium for a $50,000 specific is going to go up by a trend factor that exceeds first dollar trend every year. It's just simply to leverage trend leverage trends give a quick you to offset the premium as well, right? I usually do that by the, the example of home equity cause people like home equity gains, right? So you buy a house for $100,000 except you borrowed $90,000 from the bank to do it, right? If you're in the right market in one year, the house is now worth $110,000 and your equity is $20,000 that's a huge increase. Whereas the whole house only went up 10% you doubled your money. Okay, reverse that is what happens with claim Trent. Okay. To claims.
John: 16:31 Yeah. What it means is, is the cost to insure a claim that is let's say $100,000 a year that they're pricing for actuarily and you leave it there and you leave it there. And if they incur that same claim that let's say it's a double knee and it's a hundred grand this year, next year it's going to be 110 so in order to ensure that same specific deductible, the carrier now takes on $10,000 more, a additional cost to them to pay out that claim, which means what if they charge you more in premium, which is leveraged trend,
Hobson: 17:04 Right? So the $50,000 example on your example exactly. The first year it was 50,000 in excess of 50 then it becomes 110 so now it's 60 excess of 50 so I went up how much did the stop-loss claim go up? $10,000 over 50 is a 20% increase. Even though overall training was only [inaudible].
John: 17:22 Yeah. So when when you look at stop-loss renewals and your group is running well, and you're saying, well, why am I getting an increase? Well, you're getting a trend increase. What that means is the cost of medical care has now increased to ensure your group and pay the same claims that paid last year. It's going to cost more money to pay out, which means it's going to cost more from the insurance component. Right? Or if you increase your deductible. So go back to that. So we're gonna, we're going to look at, okay, if we want to offset trend, we're going to maybe do a baby bump of two 50 to five
Hobson: 17:54 Well I'm 55 or something like if you go to 55 you increase your deductible 10% which is equivalent to the first dollar trend. And you'll basically offset almost all the increase and in fact in this example.
John: 18:07 So talk about that for a second. So if I get a trend increase of five, what do I need to increase percentage wise of the specific developable to offset the trend increase to same?
Hobson: 18:18 Well, if you believe your first dollar trend, all the pressure on all your claims from ground up is only 5%
John: 18:26 Is it typically?
Hobson: 18:27 Well these days carriers are using, you know, to underwrite aggregate and experience rate and everything are using anywhere from eight to 10% now that incorporates the huge increase that they're using for RX because RX is starting to heat up and kind of go nuts again. And what it contributes brings the total. So let's say it's 8% let's say it's eight okay. So you would need to increase your specific deductible by 8% to offset.
John: 18:54 So let me jump to a fully insured product. When they talk about a trend increase and it's, well they're bitching cause it went up 8% or they just simply were changing, no factors, no nothing. We're, we're getting increased 8% just to keep up with the cost of medical care.
Hobson: 19:10 Let's assume that there were no major pool claims and Nope, everything is kind of nice and quiet and they hit pretty much expected claims then. That's exactly right. There were saying that if you're in a network with, you know, a PPO network, et cetera, those contracts are all going to go up, you know, five, six, seven, 8% and so they're saying I need that just to stay even. I mean
John: 19:31 Just to break even. Yeah. So the employers are bitching, brokers are bitching and it's like, well the cost of medical care is increased just by trend. Meaning what they pay for a knee last year versus this year is a percent more. So the cost of insurance to ensure that same knee surgeries more money. So let's go back to the $50 60,000 we talked about bumping it. Just to give you an idea of what I look at is if this year is the same as last year, I'll say, okay, if we're going to increase the deductible, and you can tell me if I'm wrong to 60 right, what's the premium savings? Let's say I save $15,000 in premium savings and last year one person breached it. So if last year is this year, okay. Or this year is last year. Okay. That one person is probably going to cost us the extra $10,000 because they breached a 50 and went over 60 so I take on $10,000 more claim costs as an employer, but I save 15 so my head 15
Hobson: 20:24 So the 10 goes in here because why? Because if the specific deductible goes up, you expect more claims [inaudible]
John: 20:34 Yeah. So if I, if one person breaches it, which you assume they breach not only the 50 breach, the 60 I say 15 grand on one side to lay out 10 more. So if one breach it, I'm okay, but if two then I lose, I'm behind five grand. So got to play with those numbers. And say, okay, based on my premium savings by changing a specific deductible, how many people breach it where it doesn't make sense, and you've got to make that determination as a consultant and no one group knowing your risk.
Hobson: 21:01 Well, and if you're talking about a hundred life group, you know we're not talking about a great deal of credibility in the frequency numbers anyway. We're not talking about a great deal of credibility at 400 lives. Even as far as a hundred thousand dollar claim level, it just all changes. A lot of it is basically you got to realize that a basic principle for underwriters for specific stop-loss insurance is setting the risk is that if you have set your specific deductible at a level where you expect a whole bunch of claims against the premium, you need to raise your specific deductible because then it becomes risk. It becomes finance. You're, you're flop, you're swapping dollars and why you swap dollars and that leads to taxes. That leads to a discussion of what happens when this little pot that represented the claims in excess of the specific, okay, what's covered by this specific stop-loss and the specific premium is paid for it.
Hobson: 21:54 What happens when that gets to be a significant size? You know, I mean we're talking in three hundred thousand four hundred thousand dollars or something like that, right? Well actually assuming that's a hundred thousand or $125,000 deductible, $150,000 deductible, something that's not a half a million, okay? The chances are we're not going to get, the carrier is not going to see a zero loss ratio account at that level, okay? So you're going to have something, it'll be 10% or 50% or 70% or 150% okay. Or 200% but the point is there are going to be claims against a $400,000 premium pool, okay? So that's where they look and they say you may not be keeping enough risk into your aggregate. You're insuring your catastrophic risk at too low a level. If you really are comfortable there. One of the things we could do to lower the premium, right is what did we do over here on the claims that were lower than the specific deductible?
Hobson: 22:57 We put them into a pot as a whole, right? And then we, we have an attachment point that represents a self-insured risk by the employer, the corridor, the aggregate corridor, 125% of expected, something like that and in fact what happens there then is that I am taking the risk that the claims will go from below expected claims to as much as 125% of expected claims and then my losses are stopped. Okay. But that only involves the claims up to the specific deductible. Remember I said the specific deductible puts claims into one of two subsets, right? All of the claims below the deductible and the claims that exceeded deductible. Well this, this pot represents the claims that exceeded that deductible. When it gets to a certain size, who's to say we can't ride aggregate on that subset of claims and that's what an aggregating specific is. That's all it really is.
Hobson: 23:53 Now they don't attach it 100% of expected claims. They, what they do is they let you, they being the carrier, let you self-insure some portion of what that premium say that premium was going to be 400,000 okay. They say, look, the chances are you're going to have, you know, at least a hundred thousand dollars worth of excess claims. This is all above, I don't know, $100,000 specific deductible. Well, why do we charge you a premium and then low taxes and commissions and fees and stuff on top of it when we're just going to turn around and give you back $100,000 so why don't you basically write a little baby aggregate, okay. On excess claims, claims, exits of the deductible. When you hit 100,000 when you've paid 100,000 of claims that would otherwise be in this pot, then we'll come in and in exchange for that, we'll knock off $100,000 of premium or something like that.
Hobson: 24:59 Bring specific. Where do you typically see that? Where's it a right fit? Once you'd brokers use it whenever the carriers don't want to do this, unless the premium is significant for the reason I said earlier, when the premium is a certain height. Okay. A certain size, then we can look at it and say, you know it's reasonable and logical to assume any group is going to have claims against that premium. Some claims they might not be very much but they're going to have claims. Okay. And it's that situation. So it just depends on the size of the group, the size of the deductible and the size of the premium. There's no magic formula and every carrier feels differently about it. Most of the time they just assumed not give up the premium. Do they want, do they want to write an aggravating specific? Well it depends on how they do it.
Hobson: 25:48 I personally like it because I can show that though downside risk dollars available to the carrier for a specific deductible is greater if I had the aggregating specific than when I don't. But some carriers don't write it that way cause they, there's a lot of carriers that really quite don't understand the theory of this. Either. They just look at it and say, we really don't want to ride it. We're going to do a one-to-one trade off. Okay, fine that, okay, whatever. All right. They will if they're pushed but not on 100,000 a premium or 200,000 a premium, but 300,000 maybe. Remember it's basically saying you should have written a higher specific deductible so that my pot would be smaller and then we don't have to deal with this. Why are they even writing the deductibles that low and then getting those factors just because the employer doesn't like risk tradition.
Hobson: 26:40 Okay. It's been their employer likes, the broker likes it. The broker likes it. Especially if they're making compensation on it, on the premium directly. Okay. They don't want to, they like it. If they can keep the rating increase. Say they've had good experience. See the lower the specific deductible and the higher this premium, the more you can actually argue that there's some credibility to the specific risks and if they didn't have a bad year, they may not get a big trend increase. Okay, well then why raise the deductible? All right, but you can still save money. The employer can still save money by saying, look, I'll just, I'll just self-insure a portion of that specific of the all those excess dollars because why not? If I don't have any claims, I just saved a hundred thousand bucks out of this 400 if I have 500,000 in claims, I'm no worse off than I was.
Hobson: 27:29 I mean, that's the way you look at it. Now, the carrier, you can say, well, why is it, if that's the way it is, why isn't it worse for the carrier? It is only on the upside for the good another's others. If there's no claims, the carrier gave up 100000 bucks, okay? Because they're only getting 300 to pay zero claims. But if they price this correctly, they actually have more risk dollars because of an aggregate corridor that you put on here and they actually exchange that for a less chance that they'll lose money. Slightly less chance. Okay. So they give up some of their positive, the upside to lower their downside by a similar amount and then if that's what it takes to keep the case. There you go. I've seen strategies where brokers or consultants or reinsurers are using a aggregating specific maybe to offset the risk of a laser.
Hobson: 28:21 Absolutely. That, that's one of the uses of an area there. There are different ways to talk to me break carve the Turkey. Okay. Yeah. And so if everyone on your group that's 50 lives on her 150 lies and we've got $125,000 laser, you know, is he challenged to give it to the employer and we've got to come up with creative options. The key is that it's on a person. So what you're basically throwing the dice on one person, does that person hit 125,000 or don't they hit 125,000 okay. If I add 125,000 to my specific premium and then do an aggregating specific for the 125 any number of people can eat up to one 25 okay? There's a trade off. If you do the laser and the person dies, God bless him. Okay? There it turns out to be no expense. Okay? And the employer just simply wins because they didn't have to spend any money and be curious, not out, because they didn't take a risk on, you know, it didn't happen. If you do it as an aggregating specific, however, and the person dies, you still got $125,000 you've got to, you've got to accumulate from everybody else before the stop-loss carrier starts paying. Got it. So it's not always so simple. You got to think about the situation and then you know, it's like, but the thing is, it's usually everybody knows what's going on. So it's like it's very positive game situation. The reinsurers know the tricks. Are you doing
John: 29:42 It on a laser that is the full blown laser? It's a conditional laser. Does that come into play if it's a conditional laser on the member of the lasers membered you know full-blown.
Hobson: 29:53 I'm okay. I'm not sure I know what you mean by conditional ways or additional
John: 29:56 Laser. You know it's somebody that if they take this med, we're lasering it specifically this med or if it's somebody that just has bad history, like anything, any hospital, say any med lasers on 100% of claims.
Hobson: 30:10 Oh, okay. I have to admit, I'm not so familiar with the conditional laser because I'm not sure how I would write it into the policy, but I don't know, maybe other people that interest are familiar with it. I get the concept of what you're saying. Yeah. I would say if you can do a conditional laser that kinda like takes care of it. Yeah. I mean you would have the sort of the same thing with you know, with a certain, a certain strategy for say, okay these two people who have these ongoing conditions, they're not going to be in the plan next year. And the carrier says, well how do I know that? What? Cause I'm going to arrange for them to get coverage elsewhere. Well how do I know that? So I'm going to put a laser that's a conditional laser. If these people are still there, then they're going to have a laser.
Hobson: 30:52 But if they're not there, then it's not, it doesn't apply. So I suppose that works just as well. The point is there are variations. If you've seen one laser policy, you've maybe seen it one laser policy and they're not all the same, they're very similar. Also ask yourself about what a no laser guarantees. If carriers actually say that in the stop-loss policy anywhere or is it an administrative letter? Where's the piece of paper you can hang your hat on when they give you a laser increase next year or rate increase? Same with rate increase guarantees. Okay. There may be some out of there, but I'm still waiting to see a definitive piece of paper that says the promise that's being made by a lot of people. Well, the rate cap too. Yeah, I mean
John: 31:38 No laser in perpetuity. I want to go back to what I S I've seen in policies and we'll wrap it up in a minute, is setting the core door on the Agora at at one 25 right? And you see some policies that they set the corridor or at one 10 and they're doing this to squeeze the attachment point and their increase in specific premiums. What is your, your thought increases, so it should be increasing the aggregate premium well that as well, but during increasing the total costs on Agora and specific premiums, just to squeeze the attachment point down to get closer to fully insured is where I see it in most cases.
Hobson: 32:13 Here's the theory. Okay. 125% again is one of those tradition things. It was like what they originally did and the original policy written by lawyers. They said, well, let's set it at 125% and everybody thought that was what the Bible said. And so it's been 125% but the fact of the matter is this, there's nothing magic about 125% you can set it in harder and some people set for smaller employers they say do stop-loss on smaller employers, but it's 135% of corridor in order to equalize the severity of the randomness. Okay. And but there's also for larger groups, you know, they can say, well we can do 120 we can do 117 and a half, we can do 115 the key is that there's a premium adjustment on the aggregate. This specific has no impact. I mean, is it impacted by where you set the aggregate attachment point, although relatively speaking, the same specific deductible will endanger an aggregate attachment point that's been set lower obviously more frequently.
Hobson: 33:13 But you adjust for that with the aggregate premium. That's the whole point. There is a total actuarial theory about of the risk of the aggregate stop-loss. A lot of people think no there's, there was no magic to it at all, but there is a full theory about it. I mean and what happens is you lower the attachment point for the same specific deductible. If you're protecting the aggregate with a specific, like our diagram up here and then you lower the the corridor. Okay. You're basically saying to the employer, the employer is going to take less and less risk. Downside risk. Okay. At a ton in 25% the employers on the risk for the difference between 101 25 if they come in below a hundred right then they, they had a good deal. They came in lower than expected claims they pocket the money. That's one of the reasons that employers do this.
Hobson: 33:59 I mean that's one of the positives. It's not usually not the only reason. If they come in at 110% of expected claims, then they've lost 10% versus where they thought it would be. If they come in at one 20 is 20 if they come in at one 25 is this 20 but then they say I'm done at one 25 I'm going to buy my stop-loss at 125% what's the premium for that? $6,000 whatever. Okay. Not a lot. Usually per head basis is like 80 cents or depending on the size of the group, you know it's gotta be a minimum amount to issue the policy, so it looks like more per person for a small group, but if you lower the attachment point, the premium's going to go up and it goes up. More and more is geometrically increases as you lower the attachment point.
John: 34:40 I see a lot of the bouquets they'll set at a one 10 Oh that's how they do the little fundings and they love to get collect more in premium. Then they love to sell. The client asks you that, Hey, you're running bad, you're running, you know you've breached your aggregate when you're running bad. When you agree it's typically not set appropriate anyway with the booklet and they just, they just play the shadow.
Hobson: 35:00 Actually they don't. The way that level funded concept works is they, you don't charge the premium. You should for the aggregate buy you lower the attachment point. The premium increase should be, let's say 80% but they only increase it 40% you know that's a small number, but still all right. Over their book of business, they're going to lose money on that aggregate. If they don't make it up, how do they make it up?
Hobson: 35:24 They make it up with that residual payment that they get. They take from the loss, the claims fund at the end of the year, whatever they, no, no, no, no, no. It's not the run out. The money belongs to the employer, but they take it as a terminal premium members management fee. Yeah, they take this, some of them, you know, claims feel wonderful. Green tree company likes you take a month and a half of and if you, if I'm surplus, if you terminate more, well they take it all [inaudible] is left over, that money goes against the premium that they lowered their premium for to make up so that their book of [inaudible], that's why they do this. This book of business is treated like it is fully insured block. Sure. That's in fact that's where they came. The book has got their level funded products by worrying about losing the 50 to a hundred market when the ACA originally was going to make a hundred lives, a small group and then Obama canceled it, but they were all ready to say, how are we going to keep our 50 to a hundred life bread and butter business?
Hobson: 36:21 The good clients are all going to go self-insured. We have to have something like that, but we don't want to lose our advantage of fully insured. So they designed the level funded premium with the residual charge and that's how they get close to being a fully insured profile for them. Okay. But in reality, you could write an aggregate only on a 50 I mean, I'm sorry, a 500 live room. Perfect. You could write 110% attachment point with no specific or a specific at $1 million just to protect you against really excessive things and the mash costs on that would be really low and there's a premium for it that makes money for the carrier if they have a block of that business. Brokers hate that though. Brokers, I mean consultants, everybody who's in the selling business, TPA is who to sell the business direct. They hate that because they say, Oh, no, no. If I have a million dollar claim, I have to be able to go to the employer and say, but we bought you specifics a year. Okay. They don't want to take the risk on the aggregate pool, but the aggregate stop-loss works perfectly fine with or without specific.
John: 37:26 Hobson Carroll, everybody. Hobson, thanks for being on the show.
Hobson: 37:28 Hey. Glad to be here.
John: 37:29 "Let's Get Specific". See you soon guys.
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