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As the Health Insurance Underwriting Cycle Turns: What Next?

Health Affairs Article Predicts a More Muted Cycle in Health Insurers' Profitability; Average Premiums Likely to be Higher but Less Volatile as Insurers Price Premiums Ahead of Cost Trends

Media Advisories
Nov. 11, 2004

Alwyn Cassil (202) 264-3484 or

Editor’s Note: To obtain an electronic copy of the article, news reporters may e-mail Alwyn Cassil.

ASHINGTON, D.C—The boom-and-bust pattern in health insurance markets—known as the underwriting cycle—is likely to be more muted in the coming years, reducing premium volatility but possibly leading to higher average premiums, according to a study by Center for Studying Health System Change (HSC) researchers published in the November/December edition of the journal Health Affairs.

Historically, the health insurance underwriting cycle has followed a regular pattern of three years of profitability followed by three years of losses. Typically, higher profits attract new market entrants and drive more intense price competition. In turn, the increased price competition leads to underwriting losses as premium trends fall below underlying health cost trends. As insurers exit unprofitable markets or lines of business, the remaining insurers raise premiums above costs, driving a return to profitability and a repeat of the cycle.

The study’s authors—Joy Grossman, Ph.D., HSC associate director; and HSC President Paul B. Ginsburg, Ph.D.—point out, however, that the underwriting cycle changed in the 1990s. Managed care’s dominance suppressed prices in unexpected ways early in the decade, just as the consumer backlash against managed care and insurers’ responses set the stage for unpredictable price increases later in the decade. The underwriting cycle appeared to break, with "longer and more uneven periods of gains and losses and less extreme fluctuation in profitability," according to the article.

Based on interviews with industry experts, the authors conclude that the underwriting cycle hasn’t disappeared but is likely to be more muted in the coming years. Continuing insurance industry consolidation makes it more likely that the industry will forgo heated price competition, while better forecasting tools will allow insurers to set premiums closer to underlying costs, resulting in less premium volatility but potentially higher average premiums.

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. For more information, contact Jon Gardner at Health Affairs at (301) 347-3930 or via e-mail at


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