Many employers have seen success in placing their critical medical stop-loss insurance in a captive structure. Here I explain the details.
A protected cell company (PCC) is a legal entity, set up by a sponsor, which is divided up into individually protected cells that are rented out by the sponsor to companies or groups who want to use a captive cell to fund various risks. The sponsor establishes the core of a PCC and the overall PCC structure. Once established, the sponsor also manages the PCC’s day-to-day activities, allowing cell owners to avoid a lot of the corporate and administrative resources typically required for a captive insurance or reinsurance company.
With a PCC, you essentially benefit from pooled administration, but not risk. Each cell in a PCC is independent of and insulated from the others and the core in terms of assets and liabilities. Often, PCCs will allow companies to own more than one cell, and typically each cell is still treated individually.
What are the Benefits to a Cell Captive
There are a number of benefits to insuring your risk using a protected cell company:
- Easy entry into funding risk – While you still have to clear the typical regulatory hurdles of setting up a captive which vary greatly depending on the risk in question, a great deal of the administrative time and money that you would typically spend is eliminated since we have already set up the shell entity for you.
- Economies of scale – With a protected cell company, you enjoy continued administrative savings due to economies of scale from potentially pooled administrative costs.
- Professional captive management – As an owner of a cell, you generally can expect day-to-day management services from professional captive managers.
Is a Protected Cell Captive right for you?
Participation in a protected cell captive is attractive, but not for everyone. Generally speaking, mid-sized companies that are dipping their toes in captive funding are the likeliest participants given the lower barriers to entry and management assistance a PCC offers. That said, there are a number of other reasons why companies of all sizes would strategically use a cell captive to address their risk portfolio. A feasibility study will go a long way in identifying if a company is a good fit for participation in a PCC.
Want to Learn More? Contact us today to discuss a captive feasibility study, which will determine your funding requirements and whether a captive is right for you.
Healthcare reform, increasing costs, lazered coverage and leveraged trends are causing many employers to reconsider their stop-loss options. These include employers who are fully insured considering a move to self-insurance and current self-insured employers.
Healthcare reform mandates have led to many employers to review the cost of their medical insurance programs including funding alternatives and the need for additional stop-loss coverage. Deciding to insure medical stop-loss and fund it in a captive has proven to be a great way for employers who self-fund their health insurance to add a layer of protection from excessively high individual or aggregate health claims and meet ACA requirements.
Medical stop-loss insurance is not considered first dollar health insurance benefit and thus stop-loss captives are not subject to Department of Labor approval in the United States like many benefits are. Also, by funding stop-loss in a captive, an employer gains access to lower-cost reinsurance they might otherwise not be eligible for as a direct purchaser.
This white paper explains how medical stop-loss insurance captives work, the common types of medical stop-loss captives and who should consider one. We hope you find it helpful and enlightening. If you have any questions at all, please don’t hesitate to contact our captive consulting team. All of our contact information is listed on the final page or this paper.
To get your FREE copy of this white paper, please fill out the form below:
Spring Senior Partner John Cassell recently organized and participated in a session at the Captive Insurance Companies Association (CICA) annual conference titled Developing the Operational Strategy of Managing Medical Stop Loss in Your Captive. Cassell was joined by co-presenters Stephen Hannabury, President of Educators Health Insurance Exchange of New England and Jesse Crary, an attorney from Primmer Piper Eggleston & Cramer PC.
The CICA session focused on Ed Health, a medical stop loss group captive consisting of 11 Boston-area colleges that Spring assisted in the development of. The slidedeck below, which was used in the presentation, details Ed Health’s success to date and lessons learned through the development and ongoing management of a medical stop loss group captive.
We hope you find this deck helpful and please don’t hesitate to reach out to John using the form below with any questions about group captives and/or medical stop loss in captives.
Recently, Spring Senior Partner John Cassell presented a session on colleges funding health insurance using a medical stop-loss captive. The session covers how to create a medical stop-loss captive, the economies and efficiencies that can be achieved and why colleges and universities should have this on their radar.
In this webcast, John is joined by Spring Partner Teri Weber and Tracy Hassett who is Vice President, Human Resources at Worcester Polytechnic Institute in Worcester, Massachusetts.
Worcester Polytechnic Institute is a member of Ed Health, a successful example of a group of colleges and universities that banded together to form a captive to fund their medical stop-loss coverage. Ed Health has completed its first year and is already generating significant savings for its expanding base of members.
Earlier this month, the Captive Insurance Companies Association (CICA) released their Annual Captive Insurance Market Study at their annual conference in Scottsdale, Arizona. This is the 14th consecutive year that CICA has released this survey, which is widely accepted as a barometer for the captive industry.
It is always interesting to see what direction the captive owner community is moving in. These are professionals on the front lines of risk financing who often see, and react, to the coming forces before some employers do.
This year, CICA polled 133 pure and group captive owners on a number of topics. There is plenty of insightful information that can be gleaned from the results, most notably to us was the rapidly growing interest in placing employee benefit in captives.
According to the survey, only 13% of pure captive owners and 8% of group captive owners currently wrote employee benefits in their captive. These figures reflect coverage for medical (stop-loss), which is the most widely accepted employee benefits coverage for captives according to the respondents. Another 9% and 6% respectfully of pure and group owners polled were likely to write medical stop loss in their captive during the next three years. Probably more telling of the reality of the market is that 41% of all pure captive owners surveyed will either be placing medial stop-loss or looking at placing it in their captive, with 31% of group captives saying the same thing.
Drilling down deeper, the report also highlighted additional areas where pure captive owners will be considering employee benefits program for their captives: 30% will consider Disability Insurance; 29% – Life Insurance; 26% – Accident & Health; 21% Foreign employee benefits; and about 7% will look at Retiree Medical. For group captive owners, they are also considering funding their member’s employee benefit programs: 27% will look at group Accident & Health coverage; 21% – Disability; 17% Life Insurance; 11.5% Retiree Medical; and 6% will review foreign programs.
Unsurprisingly, according to CICA, Affordable Care Act (ACA) changes and delays are a driving force for the growing interest in seeking an alternative method of funding employee benefits.
The results of this survey are not surprising to our Captive Consulting Team. Over the past few years, we have seen a dramatic increase in client interest in alternative funding solutions for employee benefits. To meet this growing need, we have been working with insurers and service providers alike for years to help prepare them for this growing demand and to help create competition in the market place for our clients. It is a win-win.
At Spring, we pride ourselves at staying ahead of the curve. By analyzing a number of factors, including external and political forces, our consultants are able to envision the direction of the industry and provide clients with the most innovative and beneficial solutions before everyone else.
Helping employers become more efficient fund their employee benefits in captives is not just another example of how Spring stays one step ahead of industry trends, it is how we drive industry trends through innovation and execution. We have been developing innovative employee benefit captive solutions for years; going so far as to develop patented funding methods for saving employer’s money.
If you are an employer that is feeling the crunch of rapidly increasing employee benefit costs and regulations and are seeking a way to fund your benefits in a more cost-effective and efficient way, you would likely benefit from speaking to our experienced consultants. Spring’s Employee Benefits, Risk Management, Captive Insurance and Actuarial Consultants can help you evaluate your business’ needs and determine if a captive is your best solution.
Contact us today and start putting the techniques used by more and more of those “in the know” in the captive industry to work for you.
Image credit: Chris Potter via flickr
Healthcare reform, increasing costs and leveraged trends are causing many employers to reconsider their stop loss options. These include employers who are fully insured considering a move to self-insurance and current self-insured employers.
Healthcare reform together with a weak economy has led to many employers reviewing the cost of their medical insurance programs including funding alternatives. In many instances, the Accountable Care Act (ACA) is increasing employer costs providing further incentive for the employer to find savings.
Self-insurance with stop loss saves money through elimination of carrier premium taxes, improved cash flow as the employer holds on to the claim lag between date of service and date of payment, exemption from state mandates (though not from ACA mandates) and reduced administration fees as these are bifurcated from the claims costs.
As claim costs are not completely predictable, self-insured employers are usually able to budget fairly closely to actual costs through the purchase of a well-designed stop loss program. Claims unpredictability generally arises from variance in the number of large claims for any one claimant and the cost per large claim.
The purchase of specific stop loss insurance coverage protects from claims on any one individual exceeding a threshold amount, say $200,000, in a given year. Larger employers choose specific stop loss attachment points as high as $350,000 to $750,000 while smaller employers may choose stop loss levels of $30,000 to $100,000. An actuary can best recommend an appropriate attachment level to assure a small likelihood of claims exceeding a tolerable risk level, such as 110% or 125% of expected.
Stop loss rates typically increase well in excess of medical trend. So if your underlying program costs have gone up say 8% your stop loss costs are likely to go up well in excess, for example, 13%. The reason for this is the leveraging impact of the attachment point. This results from the fact that claims that were just under the attachment point in 2012 with regular medical trend will be over the attachment point in 2013 and these will be added to all the trended claims already over the attachment point. To counteract this, employers often regularly increase their attachment levels.
The most common stop loss terms cover claims on a paid basis. For self-insured first timers, moving from a fully insured program is typically 12/12 – incurred in 12 months and paid in 12 months. This first year is referred to as “immature” as there are fewer expected claims paid due to the claim lag. The second year “mature” terms might be 24/12 to cover the incurred claims run out from the first year. For an increased price, a terminal liability option may be offered, where upon termination, the employer can purchase additional protection to cover the remaining claim run out.
In the past, stop loss policies typically included a lifetime limit of $1-2 million. As employers can no longer limit their underlying plans it is important to have this lifetime limit removed from your stop loss policy if you have not already done so. Stop loss carriers may still look to impose annual limits. It is important that you make sure any annual limits coordinate with your underlying plan.
A crucial coverage for smaller employers is aggregate stop loss protection. The typical cost is $5.00 or less and protects against actual claims on amounts below the specific attachment point exceeding 125% of expected. Though the likelihood of hitting the aggregate attachment point is small, the cost for this sleep-well protection is cheap.
Aggregate stop loss should not be confused with another offering to lower price – an aggregating specific deductible. By way of example:
Often the reinsurer will reduce premium one for one, or $100,000 in this example.
At time of purchase and annual renewal, most stop loss carriers ask for disclosure statements requiring the employer to disclose an adverse developing SMCe bid submission to the carrier. Typically they would like this about 30 to 45 days prior to the effective date. The disclosure statement asks for individual detail for potential large claimants based on past claim history, certain diagnosis, etc. If something adversely material shows up, the stop loss carrier may want to discuss options such as raising the price, putting in aggregating specific deductible or lasering (excluding certain individuals or using a higher deductible for certain individuals). Carriers willing to provide final rates earlier may build additional margin into their rates.
Typically, employers purchase stop loss on a single plan basis. Most coverage is purchased in the commercial market. Some employers purchase coverage from their owned captive reinsurer already providing insurance protections to other risks of the employer. This allows the captive to retain pricing risk margins.
As medical stop loss risk is generally uncorrelated to the remaining captive risk the overall employer risk profile is reduced through this approach. Furthermore, the stop loss program can be geared towards the needs of the employer including for example various risk sharing arrangements. The captive will typically purchase reinsurance protection to cover catastrophic claims and perhaps share in the claims risk. Generally carriers writing captive reinsurance protection are experts in this area and are not the usual direct stop loss writers.
More recently some like-minded employers are pooling together to create their own stop loss insurer to write the stop loss risk; thereby retaining stop loss pricing risk margins. The employer owned stop loss insurer purchases reinsurance protection as necessary.
Even more effective is when employers pool together for the purchase of administrative, network, medical management and wellness services. This not only creates administrative cost savings but also provides an opportunity to create wellness programs and plan designs best suited to like – minded employers assuring the health of their employees and their own wealth through lower claims costs. Typically, these groups can save 10% to 15%.
There are other alternative terms and provisions that may be included in your stop loss policy. These terms may vary between stop loss carriers. Now, with renewal season upon us, is a good time to review your policy.