I’ve been thinking more about the bare county problem and I am not as worried about a state being completely bare but I am very worried about particular counties being bare on a strategic basis.
Let’s imagine that there is a large insurer in a state that is currently mostly bare. That insurer is currently out of the Exchange in most/all of the state. That insurer previously had spent time on the individual market in most of the state. It has covered a significant number of lives in the state through the combination of Exchange, Medicaid, CHIP and employer sponsored insurance. The claims data is not exhaustive but it is big enough, recent enough and clean enough to have a decent signal in it.
There are a few people with persistent million dollar claim years and a population of people with a detectably higher probability of catastrophic claim years in any state. The insurer with deep data has a fairly decent idea of where these people live. Given the risk adjustment system and the limited reinsurance for million dollar claims, the insurer who covers these individuals will not be adequately compensated by risk sharing mechanisms. They will only be able to pay those claims through high premiums.
Some insurers that possess a significant information advantage may look at a bare state and tell the state regulators that they are willing to enter Rating Regions 1, 3, 4, and 5. Rating Region 2 is a black hole of highly likely catastrophic claims and they won’t touch it.
That is the scenario that I think is fairly likely if and when we start seeing bare regions.