Demystifying captives: What benefit pros need to know

Captive insurance program adoption rates are skyrocketing, making captives one of the fastest-growing alternative funding solutions of the past five years. While many employers enjoy the power, stability and transparency that captive solutions provide, others find it difficult to embrace an alternative funding model they know little about. That includes benefit brokers who are charged with helping their clients identify and choose the best possible plans and strategies for the employee populations they serve.

Join us for a deep dive into captives — what they are, how they evolved, how to determine the quality of a captive and how to assess whether your employer client is a good fit.

A captive is an insurance company that is often owned and controlled by its employer members. Though they offer unique benefits, exploring captives can be intimidating for employers unfamiliar with the evolving alternative funding landscape, in part, because of the variety of captive subcategories. Consider the following:

·       Property and casualty (P&C): Protects against property losses stemming from causes including fire, theft and damage, as well as liability losses such as lawsuits and injury claims.

·       Medical stop loss: Designed to insure the healthcare-related risks of its members.

·       Single parent: Owned and controlled by a single organization.

·       Agency: Owned wholly or partly by an insurance brokerage to insure clients' risk.

·       Sponsored: Allows third parties to "rent" access to the captive.

·       Group: An arrangement in which a group of forward-thinking and like-minded employers become stakeholders in an insurance company and combine risk to increase their power.

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Group captives are particularly popular among small and midsize businesses (SMBs) since they are an attainable avenue to medical stop-loss coverage and provide SMBs the purchasing power larger companies enjoy, among other key advantages. For this reason, we'll focus on group captives moving forward.

Before we proceed to group captives, let's take a step back and review how captives became an option for employers seeking an alternative way to fund employee health plans.

Captive insurance programs as we know them can be traced to the 1950s. The manufacturing boom in post-World War II America caused large companies in industries such as steel and mining to seek better tools for managing property damage, general liability, product liability and worker's compensation. P&C captives allowed these companies to stabilize insurance costs and gain greater control over claims, providing coverage for risks not covered by commercial insurers.

Captives continued to be used primarily for P&C purposes until the Obama Administration passed the Affordable Care Act (ACA) in 2010. Employers facing rising costs to comply with ACA requirements began to turn away from traditional insurance models toward alternative funding solutions, signaling the captive's progression from P&C to medical stop-loss coverage and self-funded employee health plans.

As every employer knows, the cost of providing employee health benefits continues to escalate. Today's average fully insured employer spends over $24,000 each year per employee family, driving three out of four SMBs to explore alternative funding solutions like group captives.

Key selling points

SMBs flock to group captives because they promise large group purchasing power, lower pricing volatility and greater transparency into claims and data compared to fully insured employee benefits plans. Employers that leave a fully insured plan to join a group captive save over 15% on average with the potential to keep unused premiums, all while benefiting from an environment that encourages collaboration with like-minded peers.

However, not all group captives live up to this promise. When working with employers to assess their group captive options, they'll want to prioritize captives that possess the following attributes:

Configurability to fit their needs
In progressive captive programs, employers select their preferred third-party administrator, pharmacy benefit manager, network and point solution configurations. Configurability allows SMBs to customize their employee health benefits plan to fit the unique needs of their employee population – making it easier to manage addressable and avoidable risks such as unnecessary emergency room visits, which cost employers about $1,800 per visit on average. 

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Measurement and support to manage addressable and avoidable risk
Inspiring lasting behavioral change in your client's employee population requires a solid strategy and can involve a few difficult conversations. They should join a captive that provides a custom guide that outlines specific actions to address avoidable risks and manage costs. It's important to ensure the captive tracks actions taken toward managing addressable and avoidable risks since measurement is the hallmark of an accountable captive environment. Additionally, they will want to ensure that the captive is backed by client success personnel for ongoing support to implement these strategies. 

Incentives that promote accountable member behavior 
Clients will want to join a captive that rewards employer members that take actions that contribute to the captive's sustainability. Rewards may come in the form of favorable rate caps, no new lasers, underwriting surplus and renewals for employer members that use available resources to address avoidable risk and engage in effective cost management. An action-based rewards system ensures the captive is not retaining high-cost employer members by subsidizing their uncontrolled costs onto low-cost employers – a damaging practice known as adverse risk retention (ARR) that every prospective captive member should be aware of.

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An assessment checklist for group captive readiness 
Just as employers will have standards when weighing their group captive program options, a captive worth their trust will have standards for its members, so it can avoid potential issues like ARR. Review the checklist below to determine whether your employer clients are ready to join a group captive.

• Long-term vision: Does your client have a long-term vision for their employee healthcare strategy beyond just short-term premium reductions?
• Commitment and effort: Are they willing to invest the necessary efforts and resources to effectively take part in a group captive?
• Risk tolerance: Are they comfortable assuming additional fiscal responsibility associated with self-insurance and the captive risk layer?
• Capital investment: Are they prepared to commit additional capital to fund and secure the captive's initial surplus, typically ranging from 10% to 15% of the first year's premium?
• Learning and understanding: Are they willing to invest time and resources in understanding captives, their financial implications and the ongoing commitment involved?
  

If the answer is "yes" to all of the above, then your employer client would be a good fit for a captive. The next step will be finding a progressive captive program that offers flexibility, rewards proactive risk management, provides ongoing support and otherwise fosters a culture of accountability.