New Report Suggests Some Insurers Are Shifting Premium Dollars Into Reserves And Understating Their Earnings

All insurers are required to set aside a certain portion of premiums for future claims that have not yet occurred and/or not yet reported over the expected term of the policy. Back in April I wondered if insurers were shifting some of their earnings into reserves in order to inflate their medical loss ratios — which measures the percentage of premiums that are actually spent on medical care — and keep their reported profits artificially low (remember, they keep insisting that insurer profit makes up just 4% of national health care spending).

Well last week, Consumers Union released a report suggesting that at least some nonprofit insurers are “setting aside unnecessarily large surpluses even as some of them continue to raise premiums”:

The report released Thursday by the Consumers Union, the nonprofit publisher of Consumer Reports, found that seven of 10 Blue Cross Blue Shield affiliates examined had amassed surpluses that are more than three times the level regulators deemed necessary for them to remain solvent.

At the close of 2009, for instance, Blue Cross Blue Shield of Arizona had a surplus of $717 million, more than seven times the regulatory minimum. That same year, the company raised premiums for its individual market customers between 8.8 and 18.4 percent.

Similarly, Regence Blue Cross Blue Shield of Oregon had about 3.6 times the regulatory minimum surplus, yet it raised rates on some individual policies an average of 25.3 percent in April 2009 and 16 percent in April of this year, the study found.

As Ken Terry observes, “What all of this says is that insurers, whether for-profit or not-for-profit, will try to maximize their margins in any way they can. And when they’re sitting on a pile of cash, they’re going to invest it. It would be nice if they would rebate some of their surpluses to policyholders, as some auto insurance companies do. But, short of a federal mandate, that’s unlikely to happen.”

Insurers are required to report their reserves to state insurance commissioners, “who review them to gauge the financial soundness of each insurer.” It’s up to these commissioners to ensure that the issuer isn’t overstating reserves and understating its earnings. This report probably suggests that at least some commissioners are asleep at that wheel.