Carriers To Drop Reinsurance? Transfer Medical Risk to Capital Markets?

In January 2011, Aetna announced the first health insurance linked securities deal, transferring medical benefits risks to capital market investors.

Aetna entered into a quota share reinsurance agreement with its domestic captive, Health Re, which simultaneously entered into a 100% excess-of-loss reinsurance agreement with Vitality Re, a Cayman Islands special purpose entitiy. Vitality Re then sold $150 million of BBB-rated notes to Goldman Sachs, which were sold to qualified investors.

The attachment point triggering the reinsurance is a medical loss ratio of 104%. By comparison, Aetna’s fourth quarter 2010 loss ratio was 83%, down from the prior year’s 84%.

Editor’s Note: Why don’t self-funded employee welfare plans transfer catastrophic risk to capital markets too?