Underwriters are the key people in an insurance company. They are the people who look at applicants, apply a system of equations and probability trees and figure out what a reasonably close price for the risk adjusted projected cost of an individual. If the underwriters guess too low, the insurance company won’t collect enough premiums to pay all claims. If they guess too high, customers will leave as they can get better deals elsewhere.
PPACA has introduced a paradigm shift in underwriting health insurance products. The change has primarily occurred on the very large group and individual markets right now. Small and medium sized employer sponsored group health insurance will be underwritten in a different fashion this summer and next fall as the 2013 policies expire and new business is written.
There are three different flavors of underwriting for health insurance. PPACA uses modified community rating. Most small and medium sized groups are currently underwritten by either experience or statistical underwriting that incorporates dozens of variables. Before we look at the implications of the underwriting change, let’s understand what these systems do.