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Six factors have historically influenced a six-year health insurance underwriting cycle.
ABSTRACT: The underwriting cycle is a thing of the past for most health insurance companies. There were six primary factors that caused the six-year pattern of the underwriting cycle for 1965-1991. These factors were claims payment cycle time, renewal dates and process, growth versus profit objectives, role of the actuary, rate regulation, and reimbursement methods. Most companies have made major changes to influence these factors, which will prevent a recurrence of the underwriting cycles of the past.
THE PHENOMENON of the underwriting cycle has been well documented. The health insurance underwriting cycle demonstrated amazing regularity during 1965-1991-a six-year cycle of three years of gains followed by three years of losses. The years since 1991 have shown a different pattern, however, which has led some observers to question whether the underwriting cycle will continue into the future.
Based on my experience in the industry, the underwriting cycle will continue into the future for some insurers but not for most. This is attributable to the actions taken by insurers, both profit and not-for-profit, that will help them avoid the swings of the underwriting cycle in the future. Even for those companies that do experience underwriting cycles, the swings will not be as severe as they have been in the past.
There are six causes of past underwriting cycles that explain the cycle itself as well as the six-year pattern. These factors work in concert with each other. In this brief comment I outline these factors and what lies ahead for the health insurance industry.
Six Contributors To The Underwriting Cycle
* Claims payment cycle time. Before the recent improvements in electronic claims submission, auto-adjudication, and other technological advances, cycle time as measured from service date to payment date of a claim was often 90-120 days. This implied that at any point in time, the three or four most recent months of experience used in financial or pricing calculations were based primarily on projections of past claims data, generally per member per month claims projected forward with a trend assumption. This straight-line type of projection for the most recent months often led to a delay in recognizing that trend was turning upward or downward, causing pricing...