As the Cayman Captive Forum starts just this week. We are proud to announce Spring and our consultants have been recognized for multiple awards from Captive International’s Cayman Awards 2022. We look forward to continuing to do excellent captive work in all domiciles, including but not limited to the Cayman Islands.

Spring has been awarded for:

Captive International has released the winners for the 2022 US Awards. Spring is proud to announce that our company and our Managing Partner, Karin Landry were selected as winners for Best Feasibility Study Firm and Best Feasibility Study Individual (respectively). We were also highly commended for Best Actuarial Firm, Best Individual Feasibility Study (Prabal Lakhanpal) and Best Actuary (Peter Johnson).

A (Brief) VCIA Session Recap

I had the pleasure of speaking at Vermont Captive Insurance Association (VCIA) Annual Conference last week, joined by two colleagues with impressive backgrounds. Jeff Caudill, Director of Risk Management at Haskell and a client of Spring’s, and Mary Ellen Moriarty, Vice President, Property & Casualty at College Insurance Company (EIIA) joined me to discuss different ways that captives can be used to tackle the hard market hurdles we’re currently facing in the insurance industry.

With myself as the moderator and consulting actuary, Jeff representing a brand new single parent captive, and Mary Ellen representing a veteran captive, it was a well-rounded panel that pulled in multiple perspectives.

The Clouds Behind the Hard Market

 

This visual does a great job at illustrating the many challenging atmospheric effects in the insurance air right now, particularly on the property & casualty (P&C) side of the fence (no pun intended). With Mary Ellen representing the higher education space, we felt it important to highlight unique risks that colleges and universities are grappling with, in addition to the other complicating factors (or clouds) we see here.

In my work I’ve seen that this climate has resulted in increased carrier profitability for certain lines over the last couple of years, such as auto liability, but decreased carrier profitability in others (such as cyber and commercial property).

In higher education, Mary Ellen explained there have been hard market consequences due to underwriter inability to achieve profitability, and as noted in the visual, they are dealing with risks many organizations don’t need to think about, like traumatic brain injuries, the general public accessing the property, and a different kind of medical malpractice. As a result, there are a limited number of carriers willing to provide coverage in this space. As a nod to captive advantages, EIIA was able to grow surplus from their captive prior to the hard market, from 2002 to 2022, which has been extremely helpful in this “stormy environment.”

This success story led us to a discussion around the business case for captives, a snapshot of which you can see here in this video.

Jeff then gave a bit of a play-by-play regarding the process, implementation, timelines and driving forces behind Haskell’s decision to switch from a group captive to a single parent captive (a synopsis of which you can find in this case study).

Looking Ahead

Both Jeff and Mary Ellen described some next steps for their captives, which may include writing in:

Food For Thought

Like most good things in life, you kind of had to be there to get the full experience and maximize your take-aways. So I don’t want to give it all away, but I will leave you with some food for thought that came out of the Q&A for the session. If you want to know the answers, please get in touch!

And last but perhaps most importantly:

As you can see, we can have some fun in the captive world, and much of it was had at VCIA! Before you leave, check out our captive business case video here, inspired by this presentation.

Our Chief P&C Actuary, Peter Johnson participated in a panel discussion at the Vermont Captive Insurance Association (VCIA) Annual Conference on hard-hitting solutions to hard market concerns. Check out this article in Captive International which summarizes key points of the discussion.

Cell Captive Overview

A protected cell company (PCC) is a legal entity that can be considered as a condo of insurance. A PCC facilitates a turnkey solution for companies by offering clients an individually protected cell that is insulated from the risk of other cells within the PCC; each condo operates as its own captive (with certain restrictions) and does not share risk or rewards with the other condos in the building (PCC). PCCs can vary in type and operational structures. The underlying principle of a PCC is that they are established by a sponsor that funds the capital required by the core. The sponsor is also responsible for ensuring other captives operate within the business plan parameters of the PCC. Clients benefit from a PCC as they spend less time and resources on the operational and establishment activities for the program.

When cell captives were first introduced to the market, they were largely in the form of unincorporated cells, where participation and service provider agreements worked to protect the sponsor’s investment rather than through structural protections.

The model for cell captives has evolved to allow more control for cells with the establishment of incorporated cells. Incorporated cells allow cells to even have their own Board of Directors at the cell level.

Regardless of the type, any cell captive structure allows constituents to benefit from pooled administration, but not from pooled risk, as each cell is independent. Sometimes a company will own multiple cells within the PCC, which are all treated individually.

Cell captives are attractive risk funding vehicles because they offer:

In addition to being a great solution for small and mid-sized companies, cell captives align with a range of other use cases and can be flexible in structure and purpose, for example:

Cell captives were once most commonly leveraged by mid-sized companies entering captive funding for the first time and seeking lower barriers to entry and extra assistance. While still a great fit for mid-sized companies, market conditions are driving more and different types of organizations toward cell captives.

The Surge in Cell Captive Demand

In more recent years, we have increasingly seen large multinational organizations entering the cell captive space, in establishing and owning the entire structure as part of their enterprise risk management strategy. In addition to the basic cell captive advantages listed above, other driving factors that may be of interest include:

Hard insurance market conditions as well as the landscape for emerging risks are making cell captives even more attractive. While often a good fit for more traditional lines, more and more cell captives today are being used for risks like voluntary benefits, cyber insurance, and excess liability. Further, more domiciles have passed cell captive legislation in recent years, opening doors to many.

As with any assessment regarding alternative risk financing, always start with a feasibility study. While cell captives are growing in popularity and advantageous for many, a thorough analysis of the pros, cons, and other contributing factors specific to your organization, its risk and its objectives, is necessary before any decision is made.

In April of 2022, the Bureau of Labor Statistics reported that inflation hit a staggering 8.5%. If current projections hold true, this year will have the highest inflation rate since 1981. COVID-19, supply chain problems, Russia’s invasion of the Ukraine, housing price increases, and more predictable market cycles are some of the driving forces behind such high inflation. In our line of work – insurance, risk management, and employee benefits – macroeconomic factors like these are seen in the challenges our clients face and the solutions they prioritize. To complicate things, the property and casualty realm is also subject to things like natural disasters, climate risk, changes in societal litigiousness, and ransomware/cyber risk. That said, we sat down with Peter Johnson, Spring’s Chief Property & Casualty Actuary, to discuss how this challenging environment interplays with his work in the captive insurance space.

Q: Is inflation having an impact on underwriting and pricing?


A: This is case-by-case between captives but as an overall average, yes. A captive in a strong surplus position and favorable historical loss experience will still be able to provide favorable pricing even when the industry is seeing high loss trend and rate increases. Higher frequency and/or severity trends are certainly still impacting pricing needs for certain lines, such as cyber and excess liability where experience isn’t frequent in nature and the credibility of a single company’s experience is low. Specifically for cyber, ransomware loss costs have grown exponentially over the last 3 years and rate increases are being observed by both commercial carriers and captives. Further for both cyber and excess liability where commercial market pricing issues exist capacity has also shrunk and captive are being looked to, to fill the gap.

Q: Is inflation currently impacting reserving and if not, do you think it will in the future?


A: In general, yes, for many casualty lines where loss trends are high or increasing, but this is also a case-by-case basis since captives with good data credibility and stable historical loss experience can respond to their actual loss development and may not have a need for much, if any, reserve increases due to inflation. Cyber liability, commercial auto liability and excess liability are three lines in the industry with increasing severity trends and captive reserving practices often consider industry trends when company experience isn’t fully credible by itself, so I would expect some reserve strengthening for these lines due to trend assumption increases. Supply chain issues have been an obvious issue in the used car market and depending on a captive’s auto exposure and experience, there may be both increasing auto rate levels and reserve levels for the captive.

Q: Some analysts have suggested that while commercial market insurers are concerned about inflation, the impact might be offset to some extent by the benefit of higher interest rates in their investment portfolios. Would you expect captives to realize a similar investment benefit? Would you expect it to be significant?


A: To the extent a captive’s investment portfolio is invested in higher yielding fixed income, securities or other investments that are inflation sensitive then yes, there would be some offset.

Q: Are there specific coverage lines in captives that will be more affected by inflation than others?


A: Cyber, excess liability/umbrella and auto liability have seen higher trends than workers’ comp. Geography is an important factor as well since certain areas have seen noticeably higher/lower trends than the industry average. For example, medical professional liability severity trends have increased, but this varies significantly by region. Some states are seeing double digit severity trends and rate increases while others are experiencing very modest increases. Difference in litigiousness and jury awards drive much of these state-by-state differences. Property is certainly impacted by inflation with increases in cost to build, but natural catastrophes such as hurricanes, wildfire and wind/hail have typically had more of an impact and to compound things the current supply chain and inflation issues immediately after a disaster can lead to even costlier natural disasters. According to NOAA National Center for Environmental Information 2021 came is second all-time with 2020 coming in first as far as the total number and total cost of these disasters.

Q: Would you anticipate any changes in captive strategies in response to inflation?


A: For captives with active investment advisors, I’d expect a response on the investment side depending on their current investment profile and the surplus and loss reserve position of the captive. There certainly could be a variety of responses on the insurance risk side, particularly if inflation is driving up claim severity and significantly changing the risk profile of a captive. Capitalization, limits, retentions, reinsurance, and pricing are all potentially impacted and would need to be considered.

Q: Is there any advice you’d offer captive owners regarding inflation strategy?


A: In general, it is important to sensitivity test your proforma projections every few years based on practical adverse loss outcomes and investment income scenarios. These financial projections can consider higher than anticipated inflation trends over a multi-year projection horizon. This will help determine appropriate captive capitalization levels, reinsurance, pricing, and risk margin to protect against possible adverse events.

Q: Any final thoughts on the subject?


A: Firstly, large jury awards remain top of mind for many company executives and boards. Although the impact on industry combined ratios is less obvious based on what I’ve seen, this continues to be a big concern and is part of the driving force behind pricing increases in the commercial market for certain liability lines.
Secondly, as carrier capacity presumably decreases and underwriting profit margins increase for certain carrier lines where rate level increases outpace loss trend, captives will continue to be utilized to insure more risk and recoup underwriting and investment income related profits otherwise going to commercial carriers.
There you have it. While there are many negatives that sprout from inflation, one positive is that it allows captives to continue to elevate their status as a strategic risk management and financial tactic for organizations of all kinds, and help companies better face the difficult economic climate.

In this podcast episode by the International Risk Management Institute (IRMI), Prabal Lakhanpal, Vice President at Spring, explains in a Snap Talk the basics of captive insurance.

Our Managing Partner, Karin Landry, presented on climate risk at the 2022 RIMS Riskworld Conference. Check out this session summary from Business Insurance.

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, 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.

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.

Want to 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 Employer Health Benefits Survey. kff.org. https://www.kff.org/report-section/ehbs-2021-section-1-cost-of-health-insurance/.