A number of health insurers reported better-than-expected first-quarter earnings, with the out performance driven by higher staffing figures, organizational changes and fewer regulatory reform-related losses. Most of them are moving into a third year of record profits, which has been augmented in recent months by a lingering recessionary mindset among Americans who are postponing medical treatment.
This trend in medical utilization benefited the group’s results last year as well. Unfavorable weather late last year and early this year were also at play in the utilization numbers. We wait for utilization to remain soft in 2011, which will act as a tailwind for the industry.
Looking at the past trend when unemployment increased rapidly in 2008, the utilization factor did not see a proportionate drop, indicating its lagging nature. Thus, even if the employment scenario improves in 2011, we do not expect any acceleration in utilization activity until 2012.
A primary focal point of the health insurance industry will be the Medical loss ratio compliance provision of the Health Care Reform Act, which came into effect this year. Carriers are required to keep a minimum medical loss ratio (percent of insurance premium dollars allocated to providing care) of 80% for individual and small group policies and 85% for large commercial ones.
Apart from deriving revenue from insurance premium, health insurance companies also draw revenue from investments, though only a small fraction of industry income is related to investment activity. The majority of industry investments are in short-term securities, since benefits are paid out on a consistent basis.
As a result, short-term interest rate actions affect investment revenue. Since interest rates are expected to rest at low levels for quite some time, we expect a lackluster trend in investment income over the near to medium term.
This trend in medical utilization benefited the group’s results last year as well. Unfavorable weather late last year and early this year were also at play in the utilization numbers. We wait for utilization to remain soft in 2011, which will act as a tailwind for the industry.
Looking at the past trend when unemployment increased rapidly in 2008, the utilization factor did not see a proportionate drop, indicating its lagging nature. Thus, even if the employment scenario improves in 2011, we do not expect any acceleration in utilization activity until 2012.
A primary focal point of the health insurance industry will be the Medical loss ratio compliance provision of the Health Care Reform Act, which came into effect this year. Carriers are required to keep a minimum medical loss ratio (percent of insurance premium dollars allocated to providing care) of 80% for individual and small group policies and 85% for large commercial ones.
Apart from deriving revenue from insurance premium, health insurance companies also draw revenue from investments, though only a small fraction of industry income is related to investment activity. The majority of industry investments are in short-term securities, since benefits are paid out on a consistent basis.
As a result, short-term interest rate actions affect investment revenue. Since interest rates are expected to rest at low levels for quite some time, we expect a lackluster trend in investment income over the near to medium term.
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