Health reinsurance is largely used by health benefits underwriters but not understood by most of the policy makers. In health insurance sector it is stop loss insurance that is mostly used as reinsurance. This is done by insurers so as to limit their claim for a particular period on any coverage given to individuals. For example if an individual claims amount beyond threshold limit in a period of one year up to 90% of that amount can be reimbursed by the insurer if he has purchased stop loss coverage. Likewise the insurer uses the facility of aggregate stop loss for limiting their exposure to aggregate risk over a group of policies covering specific risk. For example if a group policy is taken by a company or a group insurer buys stoploss for claims exceeding 90% of cost of claim for the amount that exceeds 120 percent of total claim that is expected.
Yet another method is health reinsurance for a part of the risk or for a certain risk of a group policy. In such health reinsurance, the insurer gets a part of premium and he will be responsible for that part of loss in aggregate or specifically. Thus health reinsurances are of different types.
Health reinsurance plays a major role in mainly three types of markets. First is when health reinsurance is available risk exposure of primary insurers will be reduced by methods in which coverage is available or affordable. For example employers will be ready for creating benefits arrangements that are self funded if health reinsurance is available. This is because when a large claim comes through health reinsurance the employers can gain self protection from the large cost incurred with huge claims. Health hazards like organ transplantation that requires huge expense will not be covered by employers who are self funded. This is possible if health reinsurance facility is available. A large pool can be created for reducing the impact of risk associated with very large claims like one that may come in case of an organ transplantation by selling coverage of stop loss to various programs of health benefit.
Health reinsurance plays a major role in giving protection to insurance entities against financial solvency. Minimum capital requirement of insurers can be reduced with the aid of bonafide health reinsurance. This method is more helpful for small entities and those who are new in market. For example a new company has started and is having a HMO of $1 million. If a claim or two comes for large amounts the company will be ruined. The only option available is health reinsurance by which they can limit their exposure to claims. But when a company has grown to have large number of lives like 50,000 or more health reinsurance becomes less important for it as risk associated with catastrophic losses can be absorbed by the company easily. Thus health reinsurances play very important role in today’s economy.