Why to Consider a Captive Insurance Arrangement
If you’re familiar with self-funded health care benefits, you already understand the advantages they offer. Self-funding is an attractive solution for employee benefits because it helps employers save on the cost of health care.
With self-funding, an employer avoids the fixed monthly premiums associated with a fully insured plan offered through a carrier, and instead assumes the responsibility and related financial risk for paying employees’ claims. With this comes a certain amount of freedom. Self-funded plans allow for financial and administrative control, an advantage not offered when an insurance carrier has the reigns. Employers who choose to self-fund can realize cash flow advantages, as they only pay employee claims as they are incurred. The company can then invest and receive returns on unused claims funds (rather than the insurer). It also provides flexibility in plan design, as well as access to plan insights and reporting.
Although self-funding is an attractive option, there is one major thing to consider.
Where worry starts to creep in
An obvious question is: What happens if a company faces one or more catastrophic employee claims? This would be less of a concern with a fully insured plan, but self-funding requires the employer to cover the cost.
Stop loss insurance is the solution to help mitigate these concerns, by putting a ceiling on financial risk. Employers can choose the stop loss coverage that works best for their needs. Specific stop loss protects a company against claims above a specified amount on a per-participant or per-family basis. Aggregated stop loss protects a company against accumulated claims that exceed a specified ceiling. The stop loss carrier is then responsible for any claims above this ceiling. This works well to protect groups against financial risk. However, for small-to-midsize groups (100 to 500 employees), self-funding may still feel like a gamble.
Why a captive makes sense
For groups considering self-funding but concerned with risk tolerance, captives provide a valuable stepping stone. Captives are essentially a pooled fund created by a group of employers that acts as its own insurance company. They allow the participants to spread financial risk between them, and provide an added layer of funds for protection against high-dollar and catastrophic claims that rise above the stop loss ceiling.
The pooled funds in a captive are available to every member of the captive; however, each individual company retains control of their individual employee benefits plan. The captive is owned by the groups who contribute to it, but managed by an independent outside vendor. If the funds exceed claims, premiums can be refunded to the participant companies—they are not retained by an insurance company.
Advantages of a captive
Why would a group consider joining a captive? Aside from offering small-to-midsize groups reduced financial risk to self-fund, they also provide several other advantages. They can help reduce and stabilize the fluctuation employers often see with year-over-year rate increases. They also offer more reporting and transparency when making health care decisions. With reduced risk comes the added benefit of a long-term strategy for financing employee health care benefits.
Who might consider a captive?
Any group interested in switching to a self-funded plan is a great candidate for a captive insurance arrangement. A captive provides a bridge to self-funding that helps groups avoid spikes in stop loss and the impact of catastrophic claims—financial situations that may currently be giving them pause.
Interested in learning more about captives?
Meritain Health can help! We align our mission as Advocates for Healthier Living and our value proposition to lower the total cost of care with captive arrangements that benefit our clients. To learn more about captives in partnership with Meritain Health and keys for success, check out our newest podcast.
You can also contact your Meritain Health representative to learn more!