Self-Insuring a Medical Benefit Program

In the United States, over 155 million people received medical and health-related benefits through some form of employer-sponsored program in 2021, according to the Kaiser Family Foundation. As healthcare costs continue to increase year over year, it should not come as a surprise to learn that after compensation-related expenses, healthcare costs are usually the second highest expense for most employers.

Employers are beginning to ask important questions about the future of their health care offerings and turning over every stone in an effort to control these ever-increasing costs. For employers that are currently leveraging fully insured plans, a prime opportunity to lower the total cost of healthcare exists through self-funding. By transitioning to a self-funded program, employers can achieve savings of anywhere from 5% to 15% depending on their program design and cost structure.

Self-insurance has become the most prevalent way to fund for healthcare benefits. Of those employers offering employer-sponsored programs, 67% choose to do so through a self-funded program.[1]

What is Self-Insurance?self insurance

Self-insurance, also known as self-funding, is a strategy used by employers to gain control over healthcare costs. In addition to control, the significant savings achieved through self-insuring is exactly why so many are considering a transition, as a viable alternative to manage and lower costs.

Self-insurance is the process of unbundling a fully insured plan, where employers use a third-party administrator to operate the plan from a benefits and claims processing perspective. This ensures that employees are not impacted by the change. The most significant difference pertains to how the program is funded; instead of paying a fixed premium amount, employers take a portion of the financial risk associated with the claims of the program, in exchange for lower overall costs.

The incentive for incurring this additional risk directly relates to the hefty charge carriers typically add on to their fully insured premiums. By taking on this extra risk, employers strip away these insurance carrier profits and are able to reduce their healthcare spending. To protect against the catastrophic losses that may occur due to higher-than-expected claims frequency or severity, employers typically take advantage of medical stop-loss coverage.

Groups looking to move to self-insurance should focus on understanding the financial and qualitative impact of this move. For this reason, we usually recommend groups that are larger (over 100 enrolled lives) to contemplate this strategy. The reason for this threshold is that most states regulations allow companies with over 100 enrolled employees (50 enrolled employees in some states) can request the insurance carriers for their historic claims information. This can then be reviewed by actuaries to help understand and outline the financial implications of potentially taking on some of the risk associated with moving to self-insurance.

Managing Risk – Stop Loss Insurance

The largest concern when considering a self-funded program relates to the risk of the program being impacted by unexpectedly high claims – be it due to the volume of claims or due to the exposure to a handful of large loss claims. One very sick individual or a series of unanticipated smaller claims could lead to a higher-than-expected claims level in a self-insured plan. Stop-loss insurance minimizes or eliminates this risk as well as dramatic fluctuations in claim costs over time, creating a level of predictability.

Aggregate Stop-Loss – Provides employer protection for the risk of catastrophic loss by providing insurance coverage for total group claims over a certain dollar amount. Stop-loss carriers issue policies that pay when the aggregate claims amount exceed a pre-determined percentage of expected claims levels.   Aggregate stop loss is usually expressed as percentage of expected claims like 125%.

Specific Stop-Loss – Provides employer protection for individual catastrophic claims. Similar to aggregate stop-loss, financial protection is provided when the claim exceeds the pre-determined deductible or attachment point. Specific stop loss is usually expressed as a deductible amount like $25,000 per individual. For both specific and aggregate stop-loss, all claims exceeding the attachment point are covered by the stop-loss carrier and not the responsibility of the employer.

Benefits

Additional benefits to self-funding include design flexibility, cost transparency, and increased savings. Further, increased insight into the actual cost of care, administrative costs, and any loaded fees or additional expenses to the plan allow for more informed decision making.

  • Full Transparency & Increased Access to Data

Many fully insured employers don’t understand the true cost of their program or areas of claims concentration, or using a broker or advisor, as commissions are often loaded into premium rates. Additionally, obtaining claim information in a fully insured environment is challenging. Increased transparency and data with self-funding allows employers to analyze cost drivers and implement targeted programs to lower utilization costs, while increasing employee health and satisfaction. In a self-insured plan this information is easily available on a timely basis, thereby allowing employers to better understand their programs and make changes to cater to their unique demographic of employees before their next renewal.

  • Program & Design Flexibility

Every state has a unique list of mandated coverages that can add significant costs for both employers and their employees. Because self-insured plans are governed by ERISA and generally pre-empt state law, employers avoid these additional costs by allowing them to design plans that meet both employer and employee needs, increasing satisfaction for all stakeholders.advantages of self insurance

  • Financial Control

Better-than-expected claims in one year can offset next year’s expenses or reduce program contribution levels. In addition, employers may choose to purchase medical stop-loss insurance or a level funding arrangement to provide additional security and create consistency from a cash flow perspective.

  • Cost Savings

Typically, premiums paid in fully insured programs include loaded fees and industry loss trends. In a self-funded program, employers not only minimize or avoid paying these additional charges, but their costs are directly correlated to their specific experience, and not that of their peers. Tools such as consumer-directed health care, price transparency tools, specialty networks, value-based plan designs, and wellness programs all can be built seamlessly into a self-funded plan and help drive down utilization costs and the total cost of healthcare.

 

Learn More

Self-insurance remains a powerful tool in an HR team’s arsenal to control and potentially reduce the burgeoning healthcare costs, as well as provide benefits that are targeted to their population. Employers who make the change can reap immediate advantages and avoid, or at least slow down, inevitable cost increases. Our client, edHEALTH, is a prime example of self-insurance done right, where their members were able to gain savings, offer enhanced coverage, and take a more targeted approach to employee benefits. Our Consulting Team is made up of highly trained risk funding professionals with years of experience. We help employers navigate the self-funding waters and to develop the best funding strategy to meet their individual needs.

[1] (2021).  2021 Employer Health Benefits Survey. kff.org. https://www.kff.org/report-section/ehbs-2021-section-1-cost-of-health-insurance/.

In a World of Uncertainty, a Captive Can Be Your Constant

As seen in the Captive Review Group Captive Report, September 2021.

With the rapid spread of the Delta variant, the Covid-19 pandemic continues to leave employers with a series of unpredictable risks directly related to the pandemic. Among these risks is the potential higher cost of healthcare benefits offered to employees, a factor which must be built into any long-term risk management or cost-containment strategy. Covid-19’s impact on healthcare costs Based on tracking data across multiple employers, the future impact of Covid-19 on high cost claims will directly impact health insurance. Key factors include:Healthcare cost management

  • Direct costs related to Covid-19: Costs associated with testing, treatment and vaccines remain a primary source of plan costs. The most direct impact on captives is the high cost treatment tied to severe hospitalizations, particularly due to potent strains of Covid-19 like the Delta variant. There may also be ongoing health needs for members who recover from Covid-19 or are long-haulers.
  • Deferral of care: Plan members have chosen to defer elective treatments. While some of this care was eventually incurred over the course of the last year, many plan members continue to hold back on care, whether because of discomfort in a hospital setting or difficulty in finding care due to bandwidth issues. This influences future costs, particularly with unpredictable costly surgeries.
  • Missed preventative care: Client data across industries also showed a significant reduction in preventative care visits, and lower test numbers in areas such as labs, CT scans and MRIs. As a result, many employers are concerned because if certain health issues are not identified and treated early, the severity of the case and corresponding cost of care may be higher down the road.
  • Behavioral health: Covid-19 propelled behavioral health issues into crisis levels. While it may seem indirectly related to broader healthcare, consider this: the national Alliance on Mental Illness reports that cardiometabolic disease rates are twice as high in adults with serious mental illness, and that depression and anxiety disorders cost the global economy $1 trillion annually in lost productivity. We are sure to see the repercussions of this in claims costs to come.

Health insurer risk premium margins built into insurance pricing have been increasing in light of all this uncertainty, as well as broader trends such increased prevalence of high cost specialty drugs and increasing hospital costs. In fact, the most prevalent specialty medications are increasing in price at 10%-15% annually, further contributing to unpredictability of future claims.

Employer Considerations

During the pandemic, employers have needed to confront their organizational philosophy on the employee value proposition and balancing the investment in employee benefits with the impact on the company’s stakeholders. The impact of Covid-19 has made employers more acutely aware of the need for sufficient healthcare coverage for employees and their families.

In order to provide attractive benefits in an environment of rising costs and volatility, employers must rethink the programs they offer and how they are funded. Many organizations have also revisited benefit program governance structures, how decisions are made, and how programs are monitored.

Perhaps your remote workforce has different needs than they did in 2019, or the pandemic has triggered new problem areas that can be addressed through wellness solutions or advocacy tools.

No matter your path, employers seeking to ensure that they offer comprehensive healthcare benefits to employees at an affordable cost need to consider the financial management benefit of potential long-term cost savings and mitigation of volatility associated with captive structures.

Captive Arrangements for Employee Benefits

As employers look at the impact of the pandemic, organizational planning requires balancing the increasing cost of healthcare with the risk associated with solutions that reduce the total cost of the program. At its simplest form, health insurance can be expensive if a fully insured program is purchased, as organizations pay a risk margin, often 20% to 40%, for transfer of the risk to an insurer. Small to mid-sized organizations typically mitigate this cost by self-insuring a portion of their healthcare risk with medical stop-loss to cover higher cost claims. However, the higher risk premiums required by health insurance, including stop-loss insurance, lead to steep healthcare plan costs and/or, in some cases, being forced to take on higher-than-optimal risk.

A captive arrangement is a strategic way for employers to benefit from self-insurance while creating a sustainable solution to partner with commercial markets. Captives provide substantial competitive advantages over traditional self-insurance, such as:captive insurance

  • Reduced total cost of insurance: Insurance carriers develop premiums by heavily weighing on industry averages, state rates and, to some degree, on an employer’s individual loss experience. This may lead to pricing that may not accurately reflect an organization’s actual loss experience. Insurance carriers usually price to include substantial overheads, including risk and profit margins. A captive provides employers an opportunity to recapture premiums from the commercial market and build a sustainable long-term model for their insurance needs.
  • Insulation from market fluctuations: Conventional commercial insurance is vulnerable to market fluctuations. This has never been more evident than today, with hard insurance markets and premiums that are increasing substantially with almost no change in coverage level. As a member in a captive program, employers are less susceptible to unpredictable rising costs imposed by conventional insurers every renewal season, as a balanced funding approach can smooth the cyclical volatility of the commercial insurance markets.
  • Protection from cashflow volatility: Leveraging a captive to fund medical stop loss can lower the cashflow volatility often faced by self-insured programs on a monthly basis. Having a captive cover claims at a substantially lower stop-loss level allows employers to smooth out plan funding and mitigate cashflow risk to the company.

For employers that may not have their own captive or the resources to form one, there are a variety of group captive solutions in the medical stop-loss space. These solutions are turnkey in nature and simple to implement. Most well-structured group captive programs aim for a seamless transition for employers where there is almost no disruption. In other words, from an employee’s perspective, the claims process is entirely the same. With group captives in particular, all the mechanical aspects are handled by the group captive management team, with minimal effort required for an employer.

There are several group captive arrangements that employers can tap into. In selecting the most appropriate arrangement, you need to consider factors such as the upfront cost of the program, the extent to which customization will be available, the flexibility you will have for your organization within the group captive model, and how renewals will work.

Looking Beyond the Pandemic

As we look forward beyond the pandemic, employers should consider ongoing healthcare program effectiveness. Healthcare costs will continue to increase and become a larger portion of organizational budgets, but it is not too late to start leveraging innovative solutions to mitigate these costs. You can proactively adjust your tactics today and be better prepared for tomorrow, and with a captive you are truly in the driver’s seat.

Tackling employee benefits and third party risks

As seen in Captive International

The “new normal”, whether it feels normal or not, is not on the horizon, but at your doorstep. Cutting-edge businesses are taking a modern approach to address the challenging market conditions while still providing competitive benefits, retaining and attracting talent, and being risk-smart and mindful of their bottom lines.

Thinking holistically and reframing your strategy around medical stop-loss, life and disability, and voluntary benefits are just a few of the ways you can use your captive to stay ahead.

 

Harmonizing Your International Benefits

As Seen On Captive Insurance Company Reports

As organizations have grown and globalization has created an international workforce, a lot of employers are faced with challenges around the selection, administration, and management of their employee benefits across the globe. International benefits programs can be a complex maze to navigate, given the varying local cultures, business practices, and legislation.

We are seeing an uptick in organizations looking to harmonize their global programs. The COVID-19 pandemic has accelerated this need. With increasing globalization and limitations of travel, employees are spending more time online, virtually engaging with colleagues across the world. We have come to rely on digital connectivity, which makes it easier to share ideas and understand the experiences of others. As many organizations moved to a remote work environmeInternational Employee Benefitsnt, employees are wondering why they ever needed to be in a specific location every day, and relocation is on the rise. With all of this said, a siloed benefits program may not align with the upwards trend of globalization. As your international employees meet online, you will want them to find comparable policies and practices being followed, regardless of physical location.

Multinational corporations as employers are relying on businesses or consumers from other countries to drive business growth. It is important to understand how to appeal to a diverse customer and employee base—how to celebrate differences while bringing everyone together. Benefits and wellness programs can serve as a unifier, engrained in your culture as a way for employees to feel a sense of belonging. Creating and maintaining a strong culture are exceedingly difficult when you have an international workforce, and a synchronized benefits program is a great way to “unite” your people.

Traditionally, there have been two major schools of thought on international programs. One is to have a completely decentralized benefits program, where each country’s local teams have control over benefit offerings. This approach has the least resistance as local teams are able to make decisions in the best interest of the local employees. From a global perspective, this limits the benefits that accrue to the organization as there is no coordination of insurers, limiting the ability to get preferential pricing. From an employee’s perspective, moving from one country to another for short-term and long-term assignments can mean a complete overhaul of their benefits. Alternatively, the second approach is where the head office controls most major aspects of the benefit offerings globally—including the insurers and the benefit plan designs. This option usually generates savings for the company, as employers are negotiating for global contracts. However, local partners usually push back on this approach or require accommodations. Providing accommodations and carve-outs creates confusion and a lack of cohesiveness, eventually resulting in the slow disintegration of the global program.

One may wonder why creating such a program is the need of the hour. Most employers are interested in providing market competitive benefits in a cost-effective manner, while being able to leverage the scale of the company across the globe. A good benefits strategy also acknowledges and adjusts to local practices and cultural needs. Finally, employers are looking to ensure that the benefits they provide are valued by their employees, who represent a diverse population across the globe.

As you can see, both of the approaches mentioned have pros and cons, but most importantly, they do not provide a sustainable way to build a long-standing multinational employee benefits program. Luckily, there is a more advantageous option. Leveraging a captive can provide organizations with the ability to create a third kind of program structure, one which brings the positive aspects of the first two approaches and builds on them to create a framework that adds value to all stakeholders—employees, employer, local, and international human resources (HR) teams.

This approach allows for centralized decision-making as it relates to insurer selection. Most of the clients we work with choose to select one or two multinational insurers, creating flexibility for local teams. Due to a stronger employer negotiating position, the centralized insurer selection process ensures lower rates and pricing across benefit lines and geographies. The transaction is structured such that the risk associated with benefits is ceded by the insurers to the employer’s captive, where it is pooled across all lines of coverage and countries. This creates greater stability for the program as a whole and limits the possible rate increases for programs and countries due to one bad claims year. Using the captive also provides employers with the ability to go beyond what local insurers will provide. Since the risk of the plan is with the captive, the insurers operate as third-party administrators and are usually willing to provide better coverage terms than under traditional fully insured plans. In addition, in cases where employers are looking to go above and beyond to provide better-than-market benefits, the captive can help fund these elements at cost. For instance, we helped a major technology employer looking to provide HIV-related coverage for its employees across the globe, and they were able to have the benefit be administered by the insurers on a local basis and pay for it through the captive. Without a captive, funding for this coverage might be difficult as local insurers may not know how to price this coverage or may not want to cover it under their plan design at all. In addition to HIV, mental- and nervous-related benefits along with fertility programs are other popular coverage employers like our client mentioned are providing in this manner, as many countries do not offer these benefits as part of their standard offerings, but they are benefits yielding an increasing employee interest.

From a local HR perspective, such a program provides some flexibility for insurer selection while being able to control local plan offerings. The additional plan offerings that may not be provided on a local level create a huge value proposition, ensuring local HR buy-in for this program.

Captives and multinational benefits programs not only save money while providing better benefits, but they also provide a holistic view of the programs from a risk management perspective and lower the administrative burden. To recap, here are some advantages that make such a program extremely attractive.

  • Fill gaps in critical coverage. Cultural norms and market availability play a huge role in what your employees across the globe want and what they can access. A benefit available in the United States may not be available through commercial insurers in Brazil. A captive allows for customized coverage and can help even the playing field for your international employees. For instance, COVID-19 has heightened the need for covered mental health assistance as a component of a health plan. A lot of international plans do not provide this essential benefit. A captive is a cost-effective way of obtaining this coverage for all of your employees.
  • Obtain higher limits. Using multinational pooling programs and captives allows employers to increase the coverage limits available to local employees. For instance, most insurers have filed local policies allowing for life insurance benefits of up to $5 million in most countries. However, they offer guaranteed issue limits of around $500,000 in international markets. Using this approach, we have seen insurers increase guaranteed issue limits.
  • Improve your reporting. A captive allows the parent organization to be one step closer to claims and plan activity. With fewer intermediaries than a traditional insurance structure, a captive leads to greater transparency and faster access to data. As a result, captive owners have enhanced data management and tracking capabilities they can use to inform decisions in real-time. This way, you can follow your investment closely and understand your return or where changes need to be made. With a global workforce, this becomes critical.
  • Gain flexibility. In traditional fully insured programs, there are limitations on the plan designs you can create. A captive creates an opportunity to customize your plans according to your unique workforce, and with a range of international needs, this will become even more valuable. COVID-19 has shed light on the importance of such flexibility, with organizations seeing changes in exposures and gaps they did not know existed.
  • Lessen your administrative burden. By eliminating conflicts and engagements with local brokers, employers reduce the time spent on administration as these needs are met by a centralized team of support staff who have all your plan information and do not need to be brought up to speed on the cultural nuances of the programs and geographies. Also, captives eliminate the need for bidding exercises and negotiations on both the central and local levels. Due to the transparency of a captive program, there is almost no need for the bidding of insurers to get lower pricing. The captive is capturing any surplus in pricing and using it to provide improved benefits to the employees.
  • Answer to a hardening market. We saw markets starting to harden last renewal season, which is a phenomenon caused by a culmination of regulatory changes and financial markets. These, along with a global pandemic, have caused insurance markets to harden at a faster rate. Today, insurers are dealing with poor investment income. With most being public companies, insurers are facing pressure to keep their share prices buoyant, requiring higher profit margins. This series of challenging circumstances is likely to result in an increase in premiums. Globalization means that no region is isolated from such conditions, and by harmonizing your international benefits, you will have more leverage to negotiate based on economies of scale. A captive is a tactical response to a hardening market with their ability to customize the coverage and fund unique expenses such as those related to COVID-19.

Maintaining an international benefits program that is comparable in value across your diverse workforce is no small feat. With globalization, digitization, and relocation on the rise, your employees are not siloed within their geography, and an integrated benefits program can serve to bring your employees together and improve your corporate culture. We have seen great success with multinational corporations moving toward a more centralized approach, where the same robust set of benefits can be offered to employees across the globe. By pairing this strategy with a captive, you can offer enhanced benefits, additional coverage, and plan designs customized for your population, all while generating savings, improving your data and reporting, and “future-proofing” your benefits program. If you have questions about how to get started on harmonizing your international benefits or are not convinced why you should, please get in touch.

Leveraging A Captive to Finance Your Employee Benefits Risk

For most companies today, its people are one of the largest investments its makes. COVID-19 accentuated this point and further showed us how the health of a company depends in large part on the health and wellbeing of its workforce. Providing competitive benefits is not just the right thing to do, but a sound business decision. Employee benefits usually account for one of the largest expense line items on an income statement for organizations. In a world where employee benefits consistently become both more important and more expensive, businesses of all types are looking for an affordable mechanism to finance these risks.  One solution that has become central to discussions about employee benefits has been captive insurance.

To provide some background, a captive is an insurance or reinsurance company – which can help insure or reinsure the risks of its owners, the parent company (or companies).

Employee Benefits & Captives

Over the past decade as healthcare and benefit costs have been rising, captives have become the go-to solution for organizations looking to bend the healthcare cost curve as well as create a more efficient employee benefits program.  More recently, however, organizations are recognizing the many qualitative advantages of a captive that can help attract and retain employees – a company’s most important asset. As we enter a new decade, these qualitative advantages or “soft costs” of human capital will drive the next iteration of captive insurance.

Traditionally, captives have been viewed as purely a funding mechanism for employee benefits that provides the following advantages:

  • Improved cost savings
    • Better control of premium costs
    • Reduce frictional costs (commissions, taxes, insurer profit, administration)
    • Capture underwriting savings
    • Earn investment returns
    • Improve cash flow for parent organizations
  • Improved risk management & increased control
    • Enhanced reporting – captive programs not only provide data transparency, but they also provide reporting in a more timely manner allowing stakeholders to make decisions regarding potential plan design changes for the upcoming year.
    • Centralized risk pool – from an organizational risk perspective, leveraging a captive allows risk managers to have a more complete understanding of the risks associated with the programs. Also, life and disability lines are usually considered to be third party risks and have a positive impact on the captive’s risk distribution.
    • Non-correlated risk – employee benefits usually add non-corelated risk for existing captive programs, thereby reducing the risk exposure to the captive.
    • Quantification of loss prevention programs and wellness initiatives – by utilizing a captive, the organization has the ability to implement data analytics programs, that provide actionable insights on the effectiveness of existing programs and the current cost drivers.
    • Design coverages and provisions for programs that are unique to the parent company – every organization has a unique set of risks and captives can be used to fill in gaps in the existing benefit programs.

While captives are a long-term financial strategy, in our view, the next generation of captive insurance will have a sharper focus on the soft costs of human capital, such as:

  • Attracting and retaining employees through innovative techniques and forward-thinking tools
    • While employee benefits account for large costs for employers, they are running a significant risk by not providing the right benefits. A comprehensive benefits package that’s meaningful to employees is consistently ranked at the top of the list when employees are deciding on a new position.
    • Owner vs. Passive buyer: A captive allows for customized benefits programs to meet the needs of your unique demographic. Employees at a technology company will have different priorities and expectations than, for example, those that work in manufacturing. With a captive you can understand those unique needs and meet them better than you could as a passive buyer with a commercial carrier, in a cost-effective manner. Addressing these specialized needs will go a long way in terms of retention and engagement.
    • By establishing a captive, employers can open doors to focus on human capital and the more qualitative aspects of a program
      • By creating a profit center, captives create cost savings that companies can then allocate towards preventative, wellness, or engagement programs.
    • A captive enables the parent organization enhanced data analytics. This data comes in months sooner than it would with a commercial carrier, meaning you can analyze your programs and make real-time decisions to yield better claims results. For example, if you know one of your biggest population health issues is diabetes, you can establish programs to address diabetes before your renewal is up. As a passive buyer with commercial carriers, the information typically comes in too late to make any relevant changes for that plan year.

Which Benefits Can I Fund Through a Captive?

A wide range of employee benefits may be funded through a captive – the most common coverages are Medical, Life, Disability, Retiree Medical and Voluntary Benefits.

Captives can be used to fund Employee Retirement Income Security Act (ERISA), or non-ERISA benefits. ERISA benefits are primarily the benefit plans sponsored by and contributed to by employers. Life and Disability plans are usually ERISA in nature. These plans are subject to federal oversight, under the auspices of the Department of Labor (DOL) and require express approval from the DOL to fund them in a captive. Approval from the DOL is subject to meeting certain criteria – using an A rated fronting carrier, not paying any more than market rates for the coverages, no direct commissions as part of the contract, requirement for an indemnity contract, to name a few.

Medical stop-loss is usually not considered to be subject to ERISA and has become an extremely popular benefit to add to a captive. The reason for this has been two-fold. Firstly, the rising cost of catastrophic claims. Self-insured organizations are increasingly concerned about the financial impact of high cost claims – unfortunately seeing $1M or $2M claims is becoming commonplace. One such large claim could have a material impact on the financial sustainability of the program. Second, the hardening insurance market is driving employers of all sizes towards a captive based stop-loss solution, as it reduces the opaqueness of the pricing process and helps employers get a much clearer understanding of their premiums and cost drivers. Usually a captive stop-loss program involves the employer creating an annual aggregate limit, and purchasing excess coverage from the commercial markets above the captive’s aggregate retention,, protecting the captive from most catastrophic claims.

Long-tail benefits such as group universal life insurance and long-term disability are ideal captive candidates. Benefits that pay out over multiple years (e.g. long-term disability and retiree medical), provide cash flow stability and loss predictability.

Using a captive for voluntary benefits has recently risen in popularity. This is a cost-efficient way of offering benefits that your employees can choose to participate in, or not. More and more employers are turning to this strategy as healthcare becomes more expensive, as a way to supplement benefits and lessen both their financial burden and the financial burden faced by their employees. One of the most attractive elements of writing voluntary benefits into your captive is that voluntary benefits typically have a very low loss ratio, which means they can generate a lot of savings within a captive. Those savings can then be leveraged to reduce premiums for employees or expand the coverage offered. An example of a prime voluntary benefit often offered in a captive structure is hospital indemnity, which can be critically helpful coverage, but one that is often otherwise too expensive to fund.

 

Retirement

How it Works

Unlike property and casualty lines of coverage, employee benefit lines have a unique value proposition. They allow organizations to recapture dollars that would have otherwise gone to an insurance carrier. Both life and disability coverages use a fronted carrier, i.e. a commercial carrier stands in front of the captive so that from an employee perspective there is no change in the way they interact with the insurance company. On the back end, the carrier cedes risk and premiums to the captive.

The illustration to the right shows how a typical fronted captive program works.Employee benefits captive

 

Under such an arrangement the fronting insurer continues to administer the program. The employer pays the fronting insurer an annual fee for its services, allowing the captive to retain underwriting profit (if any) from the program. Depending on the risk appetite of the organization and the results of the actuarial modeling, the employer may choose to buy reinsurance for the program.

 

In Closing

The typical steps involved in adding benefits to an existing captive or forming a new captive are a feasibility study which outlines qualitative and quantitative factors for consideration, such as potential savings, program structures, design alternatives, insurance considerations, and implementation requirements.

Today those in the insurance industry are facing difficult circumstances on a variety of fronts. The recent pandemic has led to hardening of markets. We are seeing substantial rate increases for clients. Captives offer a solution to mitigate these increasing costs in a sustainable manner. In addition, captives provide access to additional data and insights that can help organizations get a clearer understanding of claims drivers and therefore allow for implementation of solutions and tools that reduce claims costs. Further, captives provide organizations the ability to impact the soft costs of human capital by identifying and crafting unique solutions to meet their employees’ needs, more important now as the pandemic shed light on gaps in coverage many did not realize existed.

Captives are useful and versatile risk financing tools, especially for employee benefits. They provide significantly better cash management than can be provided through a trust and can produce impressive cost savings as compared to fully insured guaranteed cost plans.

Large Companies and Medical Stop-Loss

Medical stop-loss coverage protects self-insured groups from catastrophic medical claims. Medical stop-loss has long been used as risk management tool by small- and medium-sized organisations to limit their exposure to medical claims above their desired retention levels. This strategy has been used by single parent programs as well as group captive programs.

The reason this strategy has been more popular in the mid-market is because of two primary reasons. First, businesses have wanted to insulate themselves from catastrophic claims risk, as one large claim could have a material impact on the financial sustainability of the program. Second, the relatively small size of the groups means greater variability from an actuarial perspective. In comparison, large companies have stronger balance sheets allowing them to take on a more aggressive risk management strategy and reduce third party spend with insurers.medical stop-loss captives

As I write this in April of 2020, there are a myriad of unprecedented challenges facing both small and large employers and medical stop-loss can help mitigate some of these concerns. Recently, we have seen a shift in the market where large employers are increasingly becoming interested in reviewing the possibility of leveraging a captive to provide medical stop-loss coverage. I anticipate this trend to continue. Here’s why:

  1. Hardening markets

This past renewal season, we saw that markets are starting to harden, and given the current Covid-19 pandemic and the financial and economic climate, this is bound to continue. A variety of factors have contributed to this including regulatory changes (ACA and healthcare reform) and many recent natural disasters (Hurricane Harvey, California wildfires, etc.). Insurers for a large part of the past decade have benefited from the favorable financial markets world over, thereby reducing their need to increase rates to continue to make their target earnings per share (EPS).

As we stare towards the possibility of a recession and reduced economic output, poor investment income will have an adverse impact on insurance company financials. Further, as markets tighten, access to inexpensive cash is becoming harder. Since most insurance companies are public, the increased pressure to keep their share prices buoyant is going to result in them wanting to beat their expected EPS – which requires higher profit margins. Finally, as reserves balances diminish due to market conditions, principles of conservatism are going to require them to shore up financials, and the easiest way to do this is by increasing premiums.

These factors coupled with the ongoing pandemic, which will likely result in an increase in aggregate claims, led me to believe hardening insurance markets are upon us. This is likely to result in an increase to reinsurance costs for employers who are currently self-insured. A well-structured medical stop-loss solution can help employers navigate these market conditions by providing them greater control over the program and creating an alternate avenue for reinsurance.

Hardening markets make captives more favorable, as they allow for customized coverage otherwise unavailable in the commercial market. Employers currently using captives have been provided an opportunity to leverage the captive program to fund for Covid-19-related expenses. For non-captive employers, this impact is felt directly on their financial statements.

  1. Cashflow volatility due to higher claims costs

Claims costs have been increasing at an aggressive pace. The US has long been criticized for poor population health management, with rising chronic conditions like diabetes that are expensive to treat. In addition, the pricey cost of medication has made extremely high cost claims a reality of healthcare. Claims in excess of $1m are becoming commonplace. For large employers, who are traditionally self-insured, such claims cause volatility from a cashflow perspective, making it harder for finance teams to budget and build expected proformas. Using a medical stop-loss program eliminates this volatility as claims above the self-insured retention level are funded in the captive, creating a level funded premium plan.

  1. Upwards healthcare trend

According to studies by , while medical cost trend has been flat for a couple years, it is expected to increase from 5.7% to 6% in 2020. This rise in healthcare costs is attributable to an increase in the utilization rates. Medical trend increases are outpacing those of inflation, which was 2.07% in 2018 and 1.55% in 2019.

As a result, employers have had to leverage solutions such as high deductible health plans and other forms of cost sharing to bend the healthcare cost curve. The crux of the issue is that now organisations are having to combat both rising medical trends as well as increasing claims costs, while still needing to retain talent and provide competitive benefits.

A well-crafted medical stop-loss solution can help ease the burden for employers and provide them a sustainable way to bend the healthcare cost curve. Development of a formal reserve mechanism is an efficient way for employers to set aside dollars to mitigate large cost increases in the future. While an employer cannot control what happens in the insurance and healthcare markets, they can make the decision to put themselves in a position to be able to navigate the landscape more efficiently. We are seeing an increasing number of CFOs drive conversations around better managing employee benefits spend as it is becoming one of the largest expense items for organisations.

  1. Control

By writing stop-loss into a captive, an employer can leverage captive savings to focus on initiatives most useful for its employee demographic. We have seen employers use the captive savings for wellbeing initiatives as well as cost control programs focused on disease management for conditions like diabetes or musculoskeletal problems. This kind of structure can then be tied with programs dedicated to population health management, wellness and health advocacy for a robust, employee-first package aimed at gradually reducing claims costs.

Using a captive provides employers access to data in a timely manner, allowing them to better analyse and review drivers of claims, in turn providing them an opportunity to implement measures that would focus on addressing those drivers. While this is possible without a captive, we have seen employers are more engaged when using a captive — meaning they are more likely to create a structured approach to claims and cost management leveraging the captive. In my view, this is because of lack of funds for such initiatives and the lack of a structured risk framework in some cases. Using a captive to underwrite medical stop-loss addresses both of these aspects.

Transparency is one of the core benefits of a captive. Once organisations begin to use a captive funding solution for its medical spend, they usually begin to expand their horizons for other cost reduction initiatives. One such initiative has been carving out drugs (Rx). Using a pharmacy benefit management (PBM) solution can generate additional savings ranging between 15% to 30% of Rx spend. These savings are in addition to those that an employer may recognize by restructuring their funding approach. Further, these savings have a multi layered benefit, reducing the overall medical trend and generating additional reserves for the program to offset possible cost increases in the future.

In general, large employers are more accustomed to customization and retaining control, so a captive program for medical stop-loss aligns with their needs and enhances their ability to control their healthcare programs. Better data analytics and understanding of claims also provides employers the ability to be more reactive and make necessary changes quickly, in a much more agile setup. A captive provides monthly and quarterly reports which are usually much more detailed and timelier than those provided by a commercial insurer. Finally, adding additional risk to the captive also helps the risk managers develop a more comprehensive understanding of enterprise risk at large.

Medical stop-loss coverage in a captive continues to be a prudent business strategy for companies of all types and sizes. It creates multi-layered protection. Large employers are beginning to realize the attractiveness of such a program, whose advantages have been especially highlighted lately due to market and global economic shifts and conditions.