AM Best is maintaining a stable market segment outlook on the U.S. health insurance industry for 2023, citing reduced pressure from COVID-19-related medical costs, as well as diversified revenues and earnings and strong levels of risk-adjusted capitalization among health insurers.
AM Best states that health insurers reported strong underwriting results in 2021 and through the first six months of 2022.
Earnings from government business particularly remained very strong, supported by elevated margins in the Medicaid segment due to the continued public health emergency (PHE) declaration and lack of eligibility checks.
Despite the strong overall earnings through first-half 2022, sizeable unrealized losses negatively impacted capital and surplus, which counterbalanced approximately a third of underwriting gains. Given the direction of interest rates, unrealized losses are likely to grow into 2023. In addition, the anticipated end of the PHE and Medicaid redetermination will dampen Medicaid results next year.
AM Best expects the industry’s capitalization to decline but remain solid to support underwriting and investments risks. The decline due to unrealized losses is viewed as temporary in nature, and as fixed-income holdings mature, insurers will have an opportunity to recover the losses and reinvest proceeds at a higher rate.Doniella Pliss, director, AM Best
The report also states that smaller, less diversified carriers could be more challenged to withstand investment market volatility, and the commercial segment could be pressured by an economic decline.
Less diversified companies did not experience the favorable earnings of the past two years from government programs, particularly Medicaid, which helped bolster capital levels.
The health insurance industry saw reduced COVID-19 costs starting in the third quarter of 2022, as case counts and severity dropped. Despite the potential for seasonal fluctuation, many market participants believe that overall costs are unlikely to reach the previous scale seen in late 2021 into early 2022.
Despite industry expectations of a return to regular utilization and a potential spike in claims due to missed diagnostic services, most carriers reported lower non-COVID claims in 2021 and 2022 compared with pre-pandemic levels.
Carriers are again budgeting for higher utilization and an increase in severity in 2023.
The report also notes the impacts of higher inflation on health insurers can be delayed given it takes time for higher wages and medical supplies and equipment costs to be reflected in contracted rates.
Recession is a negative factor for the health insurance industry since job losses lead to membership declines in the commercial segment. Group membership declines can become an issue for carriers in 2023 should a recession materialize and unemployment rise. At the same time, Medicare Advantage and Medicaid are generally less affected by a recession and can even gain membership during an economic downturn.