States have increasingly looked at reinsurance as a strategy to stabilize health insurance markets and to maintain or increase health insurance coverage. A reinsurance program can be used to reduce premiums by shifting some of the expenses for high-cost enrollees to a third party (e.g., a reinsurance carrier, a reinsurance pool, the state). In addition, reinsurance may lower premiums by reducing the incentive for carriers to hold excess reserves.
Reinsurance can be linked to several strategies to make coverage more affordable, such as purchasing pools and small business insurance products. Some state strategies provide subsidies to make insurance affordable for small businesses and low-income workers. Reinsurance can also serve as a vehicle for the subsidy. If the state does not choose to apply a subsidy using reinsurance, reinsurance has other advantages. Reinsurance can smooth price volatility in existing markets by spreading risk, and keep carriers in the small group or individual market, thereby promoting a competitive market.
