Group health renewal: a 118% loss ratio, an acquisition and a moratorium deadline

Separate the structural loss ratio from the volatility.

• Incurred claims = 47.2 + 2.9 + 1.4 = ₹51.5 crore, so the loss ratio is 117%. Expense ratio is about 18%, so the combined ratio is roughly 135%.
• Large claims: 31% of ₹51.5 crore is ₹16.0 crore from 46 claims, an average of ₹34.8 lakh. Capping every large claim at ₹10 lakh leaves ₹11.4 crore of large-claim cost. The remaining ₹35.5 crore, or ₹16,136 per life against a premium of ₹20,000 per life, is the attritional cost and is itself close to 81% of premium before expenses.
• Volatility: with 46 large claims, the Poisson standard deviation is about 6.8 claims, or 15%. The single ₹4.2 crore open case is 8% of incurred claims and moves the loss ratio by nearly 10 points, so one year's figure is not a rating basis. But even the attritional ratio shows the account is underpriced, so this is not purely bad luck.
• Credibility: 22,000 lives gives reasonable credibility at the total level, but the large-claim tail is thin and the family floater structure concentrates risk in a small number of high-cost episodes.
• Moratorium: the group is at 48 months, so in 12 months the insurer can no longer contest the policy or individual claims on grounds of non-disclosure. Any adverse selection admitted now, including the older acquired lives, becomes permanently locked in.

Conclusion: the account is structurally loss-making, with a large-claim tail that the reinsurance programme barely touches.

Price on trended expected cost, then test the broker's ask against it.

• Attritional: ₹35.5 crore trended at 12% medical inflation = ₹39.8 crore.
• Large claims: scale 46 claims for 24,000 lives and a 1.25 age/morbidity load on the acquired block gives about 63 claims; at ₹24.8 lakh of excess over the ₹10 lakh cap that is ₹15.6 crore, plus a prudent allowance for one catastrophic case.
• Expected incurred ≈ 39.8 + 15.6 = ₹55.4 crore. At an 18% expense ratio and a 5% margin, the technical premium is 55.4 / 0.77 = ₹71.9 crore, about ₹30,000 per life against the current ₹20,000.
• A 30% discount takes premium to ₹30.8 crore and the loss ratio to about 180%. It cannot be accepted on any assumption set.
• The 50% quota share does not rescue this. Claims between ₹10 and ₹40 lakh are shared, but each of the three severe claims cedes only ₹20 lakh, so the recovery on the FY24 tail is roughly ₹4.7 crore against a ceding commission of about ₹2.2 crore. The treaty cedes half of the good attritional business and leaves most of the severity.

Counter-proposal. Offer a three-year agreement at a rate that reflects the trend and the acquired lives, with a rate-review clause triggered by loss ratio above 85%, an experience refund above a stated margin, a higher per-life deductible (₹25 lakh) or a group aggregate deductible, and a phased integration of the 2,000 lives with separate experience accounting for the first year. Be prepared to walk away from a 20,000-life account if terms cannot reach technical levels.

Reserving.

• The ₹2.9 crore IBNR increase is plausible at about 6% of incurred claims, but it must be tested with both a chain-ladder on monthly cohort triangles and a Bornhuetter-Ferguson estimate using the expected loss ratio, because the account is growing and the triangle will be distorted by the acquisition.
• Late-reported high-cost claims, particularly oncology and cardiac, drive the tail; check the average reporting delay for claims above ₹10 lakh and reserve by claim type rather than one blended factor.
• The ₹4.2 crore open case must sit in outstanding claims, not IBNR, with a case reserve range of ₹3 to ₹6 crore, and the actuary should show the effect on the loss ratio of the upper end.
• Run a stress scenario of one further ₹2 crore claim reported after the valuation date, since the moratorium removes the option to repudiate later.

Reinsurance.

• The current 50% quota share with a ₹40 lakh cap is poor value: it cedes profitable small claims and retains almost all severity. Replace it with a per-life excess of loss, for example ₹1 crore xs ₹10 lakh, plus a catastrophe or aggregate stop-loss to protect against a year with multiple large claims.
• If the quota share is retained for new-business strain reasons, negotiate a much higher per-life cap, a sliding-scale ceding commission tied to the loss ratio, and an inuring per-life excess layer above the quota share.
• Model the retained net loss ratio under each option and show the board the trade-off between premium ceded and volatility retained, because the decision is about risk appetite, not just price.