Medigap Loss Ratios, First 2 Years

Pursuant to a legislative requirement, GAO reviewed Medigap policies' loss ratios, focusing on the: (1) appropriate loss ratio percentages if the refund and credit provision is extended for the first 2 years a policy is in effect; and (2) National Association of Insurance Commissioners' (NAIC) methodology for calculating refunds or credits. GAO noted that: (1) NAIC uses a cumulative loss ratio methodology for determining refunds and credits which makes use of loss data from a policy's first 2 years' experience, but does not provide for credits or refunds during that time; (2) the NAIC methodology is designed to ensure a specified cumulative loss ratio for individual policies over a 15-year period; (3) the NAIC methodology is compatible with premium pricing methods to meet required loss ratios either on a year-to-year basis or over the life of the policy; (4) under the NAIC methodology, a policy's failure to meet the standard loss ratio for a particular year may not trigger a refund or credit; (5) an alternative methodology would base credits and refunds after the first 2 years on the actual loss ratio for each year, which would ensure refunds or credits each year a policy fails to meet the standard, but it could lead to more volatility in premiums; (6) if the refund or credit provision is extended to a policy's first 2 years, refunds or credits for those years would be based on lower loss ratios; and (7) the extension is not necessary, since safeguards in the law and market forces tend to eliminate nonconforming policies.