SIC 6321
ACCIDENT AND HEALTH INSURANCE



This category covers establishments primarily engaged in underwriting accident and health insurance. This industry includes establishments that provide health insurance protection for disability income losses and medical expense coverage on an indemnity basis. These establishments are operated by enterprises that may be owned by stockholders, policyholders, or other carriers. Establishments primarily engaged in providing hospital, medical, and other health services on a service basis or combination of service and indemnity bases are classified in SIC 6324: Hospital and Medical Service Plans.

NAICS Code(s)

524114 (Direct Health and Medical Insurance Carriers)

525190 (Other Insurance and Employee Benefit Funds)

524130 (Reinsurance Carriers)

Industry Snapshot

More than 1,000 companies provided accident and health insurance in the United States in the early 2000s, writing roughly $96 billion in premiums. Commercial carriers faced earnings pressure due to higher medical claims and higher expenses. The increasing growth of managed care companies (see SIC 6324: Hospital and Medical Service Plans ) throughout the 1980s and 1990s had forced many carriers to suppress necessary rate increases in the face of intense price competition. However, managed care companies themselves began to face cost containment issues in the early 2000s. As some managed care businesses found themselves forced to increase premiums, commercial carriers were able to levy rate increases as well.

Organization and Structure

Accident and health insurance is provided on an indemnity basis by commercial carriers and Blue Cross & Blue Shield plans. Under indemnity insurance, the insurer pays the insured directly for any hospital or physician costs for which the insured is covered. Other providers of accident/health insurance include specialty health insurers, self-funded employer plans, and government plans. The accident and health line consists of the following categories: group, credit, collectively renewable, non-cancelable, guaranteed renewable, nonrenewable, and other individual health and accident lines.

Accident/health insurance companies may also provide service plans in connection with health care providers. Insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. Under the service plan, the insurance company effectively agrees to provide the insured with health care services, rather than reimbursement dollars. Service plans offer the advantages of reduced paperwork and reduced financial liability for the insured.

In addition to voluntary insurance, a second type of private health insurance is managed care. Managed care plans, or prepaid health plans, have increased in popularity during the 1980s and the 1990s. By the mid-1990s, managed care plans had proven their ability to control medical costs more effectively than traditional fee-for-service insurance plans. Under a managed care plan, a person can enroll in an organization that charges a monthly fee. In return for this monthly fee, the enrollee receives access to health care services from the organization. Organizations that offer such prepaid plans include Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Exclusive Provider Organizations.

Background and Development

Accident and health insurance, like other lines of insurance, serves to spread the consequences of a loss that would normally fall upon a single individual over the members of a large group. It also ensures that health care providers will be paid for services that an uninsured individual would otherwise not be able to afford.

Although the concept of insurance dates back more than 2000 years, the first form of health insurance in the United States can be traced back to the 1800s, when merchant seamen paid a modest premium to obtain health care as they traveled from port to port. Health insurance as it is known today, however, is a relatively new concept that has its roots in the Great Depression of the 1930s.

The most popular form of health insurance is major medical expense protection, which insures a person for a maximum amount of loss. The insured pays a deductible, usually $100 to $500. This plan of insurance is favored because it protects against catastrophic losses yet avoids administrative burdens associated with smaller claims below the deductible amount. Critics of this type of insurance, though, believe it discourages preventive treatment and encourages inflation of health costs.

Growth of the Industry. It is only since the 1960s that the accident/health industry has grown massively in proportion to other types of insurance. One of the greatest reasons for the explosion in the popularity of health insurance during this time has been the increase in benefits offered by employers.

After World War II, health insurance became a popular benefit for employees. Health insurance premiums were, and remained in the early 1990s, tax-deductible to the employer and were not taxable to the employee. Therefore, it became a cost-effective form of compensation. Also, as unions began to find it more difficult to gain wage increases for their members, health care benefits became an increasingly popular bargaining tool.

One of the primary reasons for the growth of the accident/health insurance industry was the advent in the 1970s of modified agreements that shifted a greater amount of health care risk to the employers that offered employee insurance plans. Under these agreements insurers, employees, and health care providers had little reason to control health care costs because the employers, as policyholders, were paying the insurance bill. In fact, one result of these agreements was that insurance company profits increased in proportion to the rise in the cost of medical care. These circumstances resulted in an unprecedented rate of growth in group health insurance, an average of 15 percent per year in the 1970s and early 1980s.

Industry Stagnation. By 1983, changes in the American economy began to dictate a need for change in the accident/health insurance industry. Employers began to shift more of the insurance burden to their employees, as economic stagnation exerted downward pressure on company profits and a new corporate cost-consciousness developed. At the same time that employers were trying to reduce their insurance expenses, insurance companies were battling new economic and regulatory forces. Skyrocketing inflation, deregulation of banks and financial institutions, and public pressure to cap rising insurance rates all contributed to a decline in industry profitability. In response to the new business environment, insurance companies changed their products, marketing objectives, underwriting goals, and investment strategies. The end result of these changes by the early 1990s, however, was reduced industry stability, record financial losses, and company insolvency.

In addition to other problems in the industry, health care costs continued to spiral upward much faster than inflation throughout the 1980s and early 1990s. This trend helped to open the door to accident/health insurance alternatives such as HMOs and other managed care alternatives. Moreover, the current system excludes millions of Americans, a situation that threatens to change the structure and dynamics of the entire accident/health insurance industry.

Legislation. Accident/health insurers in the United States are subject to regulation at both the state and federal levels. Many of the regulations are designed to require that insurers maintain sufficient reserves to cover future liabilities. Other regulations require that companies not discriminate against certain customers or raise premium rates above certain levels that are deemed competitive by the governing body. Additional legislation that has had a significant impact on the industry relates to Medicare and Medicaid, which ensure coverage for elderly and poor citizens.

Investment Income. With a pool of large reserves to invest, insurance companies can offset some of their underwriting losses with investment income. Managers of insurance company investment portfolios were rewarded with a fairly stable year in 1996, after 1995 when interest rates rose dramatically. In November 1996 the Dow Jones Industrial Average broke 6500 for the first time. In the bond market, life and health insurers increased their holdings of below-investment grade bonds to 6.1 percent of their fixed income portfolio, still well below the levels maintained during the late 1980s and early 1990s. Insurance investment in mortgage-backed securities continued to decline in 1996 as a percentage of fixed income portfolios, reaching 26 percent after being reduced to 30 percent in 1995 and 33 percent in 1994.

Spiraling Health Care Costs. Rising health care costs made underwriting profits difficult to obtain for insurers. As costs escalate, so do claims by policyholders. Insurers have been unable to raise premium rates at the same rate as health care inflation rates. Some critics maintain that the current insurance system is partly to blame for escalating health care costs because it provides little incentive for providers to control costs. In fact, some observers believe that the current system provides an incentive for providers to perform superfluous tests, procedures, and services. Many other factors, though, have contributed to the rise in costs. They include: the burgeoning elderly population that requires additional health care, increased reliance on expensive medical equipment and technology, the shift of some costs from the government to private insurers, the costs of long-term illnesses such as AIDS and cancer, and an overall greater demand for health care services. Moreover, the meteoric rise in the cost of medical malpractice insurance has also taken its toll.

Medical savings accounts (MSAs), given improved tax status as part of the Health Insurance Reform Act of 1996, also known as the Kassebaum-Kennedy Bill, promised to offer employers a chance to reduce their health care costs. As envisioned, MSAs would combine a high-deductible catastrophic health insurance plan with an employer-paid account that employees could use to pay their regular medical expenses. Commercial carriers were prepared to join the MSA market in 1997, should they prove to be popular.

Industry Reform. Accident/health insurers are under increasing pressure from both state and federal governing bodies that seek to regulate the industry. After President Clinton's national health care reforms failed in 1994, state initiatives dominated the reform agenda in 1994 and 1995 and continued into 1996. The political realities of election year 1996 again forced Congress to address the issue of health care reform at the national level. The result was the passage of the Kassebaum-Kennedy health insurance reform package.

Key elements of the Kassebaum-Kennedy bill of 1996 included portability, guaranteed coverage, group purchasing for small groups, and medical savings accounts (MSAs). While the impact of this legislation has yet to be determined on accident and health insurers, some companies left states that had enacted similar reforms concerning community rating, guaranteed issue, and similar measures.

Increasing Competition. Higher medical claims and higher expenses increased earnings pressure in 1996. Intense price competition dramatically affected the medical loss ratios of accident and health insurers. With HMOs and other managed care organizations aggressively increasing their enrollment, some well-known commercial carriers left the health insurance business in 1996. Those leaving the field included Massachusetts Mutual Life Insurance Co. and John Hancock Mutual Life Insurance Co. Uncertainties about health care reform, changing demographics, and potential tax reforms on nonqualified products were expected to continue to pressure accident and health insurers.

Current Conditions

Life insurance companies, which underwrite accident and health plans as well, numbered 1,549 in 2001 and took in a total of $472 billion in premiums. About 20 percent, or $96 billion, came from underwriting health insurance. The continued move to managed care plans is responsible for the slowdown in premiums—health and accident insurance accounted for almost 21.3 percent of premiums for life insurance companies in 1997.

However, the distinction between commercial carriers and managed care companies began to blur in the late 1990s and early 2000s. According to an October 2002 issue of Fortune , "over the past decade consumers have increasingly migrated to what's known as preferred-provider organizations, or PPOs. Such plans contract with an extremely broad network of physicians and hospitals, cover all out-of-network care once an annual deductible is met, and reimburse doctors almost entirely on a fee-for-service basis. In other words, PPOs are so loosely managed that they're essentially old-fashioned fee-for-service indemnity plans in drag." In 2002, enrollment in PPO plans increased to 52 percent of all insured employees, compared to just 28 percent in 1996. Over the same time period, enrollment in HMOs declined from 31 percent to 26 percent.

Some analysts believe this trend bodes well for commercial carriers, which had been offering indemnity plans all along. The increased flexibility of the PPO has also brought with it higher costs, forcing many managed care providers to raise their premiums. As a result, commercial carriers may find themselves better able to compete.

Industry Leaders

Tampa, Florida-based Metropolitan Life Insurance Co. is the largest individual life, accident, and health insurance company in the United States, with assets of $193 billion in 2002. Not far behind MetLife is Prudential Insurance Company of America, which held assets of $188 billion in 2002. Both firms participated in the industry's continued consolidation in the early 2000s. Prudential paid $1.15 billion to acquire American Skandia Inc., while MetLife paid $966 million for Aseguradora Hidalgo S.A.

After MetLife and Prudential, the top insurers in 2002 were Teachers Insurance and Annuity Association of America, with assets of $136 billion; Northwestern Mutual Life Insurance, with assets of $105 billion; and Hartford Life Insurance Co., with assets of $86 billion.

Workforce

Employment in the accident/health insurance industry is representative of employment in the overall insurance industry, which also encompasses life and property/casualty insurance. In fact, most people employed in accident/health insurance work for multi-line insurers. Employers in the insurance industry consist mainly of either insurance carriers or insurance agents and brokers.

Jobs in the accident/health industry include administrative support, sales, executive, and managerial positions. More than half of all employment in the insurance industry is in the area of administrative support, which includes secretaries, word processors, and bookkeepers. Other occupations in this category include insurance policy processing clerks, claims clerks, and claims examiners and investigators.

Twenty percent of insurance employees have executive, administrative, or managerial jobs. Many of these workers are underwriters that evaluate applications to determine the risk involved in issuing a policy. Underwriters gather information on applications, review associated risks, and apply underwriting standards to reach a decision about whether or not to cover applicants for insurance. Typical career progression is from underwriter to senior underwriter to underwriting manager. Because many underwriting managers progress into general management, this occupation is popular for those seeking access to upper level management opportunities.

Other administrators and managers are employed as accountants, investment managers, or policy managers. Statistically, one of the most lucrative and rewarding opportunities in this category is that of actuary. Actuaries use mathematical models and statistical techniques to analyze risk and to create and price accident/health products. Candidates for managerial positions usually have a college degree as well as knowledge of finance, economics, or accounting.

America and the World

The U.S. accident and health insurance industry is the largest and most advanced in the world, with premiums of $472 billion in 2001. Although it was originally modeled after the British health insurance system, the industry in America differs from that of many other industrialized nations because it is one of the most privatized in the world. While most other nations, such as Canada and Britain, have already addressed rising costs and inaccessibility of health care with nationalized plans, the United States has maintained a relatively competitive and private system, with the notable exceptions of Medicare and Medicaid.

U.S. life insurers have established international operations largely through acquisitions and joint ventures. New opportunities were expected to open up in Europe toward the end of the 1990s, as European countries began to dismantle their welfare states and privatize such areas as pension coverage, health, and unemployment insurance.

Research and Technology

As markets became more competitive and profit margins continued to narrow during the 1990s, successful insurers were those that best utilized the efficiencies that automation and innovation could provide. A 1996 study of 25 top life/health insurers revealed that key success factors included efficiency in information technology, policyholder service, and underwriting.

With narrower margins and intense price competition, cost reduction continued to play an important role in achieving profitability for accident/health insurers. Besides reorganization and downsizing, the most effective way to achieve these ends was through computer automation. By implementing information technologies already proven effective in manufacturing industries, insurers hoped to significantly improve customer service, reduce errors, improve new product delivery time, and reduce human intervention.

By integrating all their company information into one system, insurers were able to synthesize efforts in product development, marketing, sales, and customer service. In addition, many companies were putting new litigation management systems to work for them that allowed law departments to accelerate access to legal research data, internal company information, and client data. This information is used to protect company interests and combat fraud.

Examples of new technology that accident/health insurers were integrating into the industry in the 1990s included open-systems architecture computer systems, network computing, computer-aided software engineering tools, multi-media training tools, and information management and delivery systems that use satellites. Industry regulators were also using this new technology to identify potentially insolvent insurers.

Another facet of research and technology, and one that has hindered the accident/health insurance industry, relates to the technological innovation that characterizes the health care industry. Although new medical technology has saved lives and improved the quality of health care in the United States, it has also created a financial burden for health insurers and has increased the likelihood of federal intervention that may negatively impact the industry.

On the other hand, the industry is seeing an increased emphasis on medical technology that serves to create more efficient procedures and services. These advances could help pave the way toward reduced costs, as well as improved service in the future.

Further Reading

"The Coming Crash." Fortune, 14 October 2002.

"Insurance." U.S. Industry & Trade Outlook '99. New York: McGraw-Hill, 1999.

Life/Health Insurance. New York: Insurance Information Institute, 2002. Available from http://www.financialservicesfacts.org .

"Top 100 Individual Life Insurers." Insure.com, July 1999. Available from http://www.insure.com .

"Top U.S. Individual Life, Accident, and Health Insurance Companies." American Banker, 3 October 2002.



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