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OLDWICK - AUGUST 25, 2021 08:54 AM (EDT)
Given that new entrants in the U.S. health insurance industry are rare, surprisingly, three early stage health insurance carriers have gone public in 2021. However, according to new AM Best report, they face significant challenges to achieving profitability, given intense competition and very favorable financial results for the majority of health insurers.
The Best’s Special Report, titled, “Public Equity Markets a Capital Lifeline for Three Early Stage Health Insurers,” states that the three early stage health insurance carriers—Clover Health Investments, Corp., Oscar Health, Inc., and Bright Health Group, Inc.—have expanded rapidly in recent years, but are accumulating capital at a much lower rate than they are growing premiums. This indicates they are stretching their balance sheets to accommodate growth. Premium leverage at year-end 2020 also compare unfavorably with other publicly traded insurance groups.
Additionally, the three companies rely on capital contributions from their parent holding companies to maintain sufficient equity. From year-end 2015 through year-end 2020, the three groups had accumulated just under $1.5 billion dollars in contributed surplus combined, not including funds raised through equity offerings currently held at the parent company level. Oscar and Bright Health in particular also are using reinsurance to alleviate the pressure of premium growth relative to enrollment growth, as a way to manage capital while still expanding their operational scale. Reliance on highly rated reinsurers further alleviates balance sheet risks.
These three companies share some attributes, such as a value proposition focused on using proprietary software to improve patient and provider outcomes, rapid membership growth and a current inability to turn a profit, due in part to the startup nature of operations. Net losses have grown at a similar rate to underwriting losses, in sharp contrast to the overall health insurance industry, whose earnings in recent years have been positive and stable. Driving these losses are high expense ratios; on particular, in the individual business, whose expenses tend to be higher than group business.
The companies also have key differentiating features, according to the report, including the markets in which they operate, the development of non-insurance businesses, the factors driving current unprofitability and the capital management strategy employed to support the growth and manage losses. Overall, Oscar, Clover and Bright Health face significant challenges. Health carriers posted record profits in 2020 due to lower utilization as a result of COVID-19. Despite a reversal of these trends and an increase in utilization in the first six months of 2021, results were better than the budget for many health insurance plans. Consequently, mature competitors may pursue more aggressive membership growth in 2021 and 2022.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=311973 .
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.