OLDWICK, N.J.--(BUSINESS WIRE)--AM Best analysis of the U.S. health insurance industry under the rating agency’s Best’s Credit Rating Methodology shows that the industry remains well-capitalized, with clear correlations between higher credit ratings and less volatility and more favorable returns on revenue and equity.
The Best’s Special Report, titled, “Health Benchmarking: Better Returns, Less Volatility for Higher-Rated Companies,” references how AM Best uses a variety of benchmarking techniques to view companies from different perspectives and angles, allowing for comparisons of absolute results and volatility levels across the industry. The primary quantitative tool used to evaluate balance sheet strength is Best’s Capital Adequacy Ratio (BCAR), which helps determine a company’s capitalization; however, AM Best takes all of the balance sheet components into consideration, as the BCAR itself is not the sole determinant of the balance sheet strength assessment.
As highlighted in the report, although 54% of rating units have a BCAR assessment at the strongest level, the balance sheets of just 23% of those units also were assessed as strongest. Still, nearly 80% of health insurer rating units had a balance sheet strength assessment of strong or better.
Surplus volatility, which is another factor taken into consideration in the balance sheet assessment, also shows to be more pronounced with lower assessment categories. When measuring companies’ largest one-year decline of surplus over the past 10 years, rating units with balance sheets assessed as strongest lost 5.5% of capital, while those assessed as adequate and weak/very weak lost capital of 41.6% and 34.5%, respectively.
Along with balance sheet strength, the key pillars AM Best uses in its credit analysis are operating performance, business profile and enterprise risk management (ERM). Operating performance in particular is a leading indicator of future balance sheet strength and long-term financial stability. The report looks at trends on operating return on equity (ROE) and pre-tax return on revenue (ROR) and their relative impact on operating performance assessment categories. Higher ROEs and RORs, favorable loss ratios and stable operations are all leading indicators for more favorable operating performance assessments.
These metrics are critical given the uncertainty about the COVID-19 pandemic’s effect on the deferral of care and morbidity risk. Risks also include pent-up demand for delayed procedures/visits, as well as the potential for higher morbidity due to a lack of treatment, which could result in worsening or undiagnosed conditions and for those individuals with residual health problems after recovering from COVID-19. Moreover, there are always concerns about other potential risks that health carriers might face over time.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=308643.
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 London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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