Phillip C. Giles, division vice-president marketing for Artex Risk Solutions, discusses the rise of group stoploss. Written by Phillip C.

Transcription

1

2 ARTEX FOREWORD MEDICAL STOP-LOSS FOCUS RIDING THE WAVE OF POPULARITY Phillip C. Giles, division vice-president marketing for Artex Risk Solutions, discusses the rise of group stoploss captives As implementation of the Affordable Care Act (ACA) draws near, there has been a significant increase in the interest in employer self-funding of health care benefits and the use of captives to provide medical stop-loss coverage. Indeed, stop-loss captives have become one of the most intriguing topics within the captive industry over the past year. More than 60% of workers that s more than 80 million individuals are now covered by self-funded health plans. Employers with more than 1,000 employee lives typically have little mechanical or financial difficulty in maintaining a self-funded programme and have access to stop-loss coverage in relative abundance. The stop-loss and overall structural options for mid-sized companies (those having between 50 and 1,000 employee lives) are, however, Written by Phillip C. Giles Phillip C. Giles, CEBS, is division vice-president marketing for Artex Risk Solutions. He has significant alternative risk experience including P&C captives, employee benefits, self-funding and stop-loss coverage. much more limited. New group stop-loss captives show significant promise in expanding the accessibility of self-funding and stop-loss to employers within this segment. Group captives are not new; they have been effectively used to cover the casualty exposures of mid-sized employers for decades. Group captives enable middle-market 35 employers to increase their underwriting credibility by collectively replicating the risk profile of a larger employer. Group captives are also empowered with the control to select service providers, determine coverage levels, manage losses, direct the use of surplus, and, ultimately, share in the results ideally generating bottom-line profit. Leveraging this combined strength helps mid-sized firms strategically balance risk retention and risk transfer to reduce the cost of risk and ultimately promote long-term stability for members. As ACA begins to take hold, a migration toward self-funding and the use of group captives to increase the accessibility of stop-loss coverage for mid-sized employers is expected to expand exponentially. The same techniques that have been successfully applied to mid-market casualty risks are discovering a new level of popularity.

3 MEDICAL STOP LOSS FOCUS ARTEX RISK SOLUTIONS FOOD FOR THOUGHT Mike Madden talks to Captive Review about the advantages of group stop-loss captives and how he envisions them as a large single company Property and casualty group captives provide mid-sized employers with access to risk financing vehicles typically only accessed by larger, Fortune 1,000 companies. By banding together in a group captive, midsized employers can replicate the risk profile of larger employers. I ve always thought of group captives as being a large company re-imagined. I also see these larger employers gaining significant advantages for their employersponsored health care plans; managing cost drivers and achieving a 2-3% annual medical cost trend increase that is more in line with general US inflation, as compared to the more typical and unsustainable 10% average for medical cost trend. How do they do it? Healthy cooking for high performance If I were the CFO of a company of 6,000 employees, I would do the following to best manage the costs of providing health care benefits to my employees and follow a successful recipe: Self-fund my health care programme since this is the most efficient delivery vehicle; Buy as little true insurance as possible that is, buy medical stop-loss with a very high deductible (above $500,000 or $750,000 per individual); Proactively manage health cost drivers with a comprehensive wellness and population health risk management programme. How would I change things if our 6,000-employee company, instead of having 36 Written by Michael Madden Michael Madden is division senior vice-president benefit captives, for Artex Risk Solutions, Inc. He leads Artex s Benefits Captives Practice and has significant experience structuring stop-loss as well as P&C group captive programmes. two or three divisions, had 30 distinct operating units averaging 200 employees each? While my company is a conglomerate with different operating divisions, I wouldn t want to extend carte blanche to my divisional managers thus sacrificing our biggest advantage: buying power and a credible sized employee

4 Artex Risk Solutions Medical stop loss focus population. Starting with the basic recipe above, I would add a few seasoning modifications to further enhance the recipe. First, I would create a profit and loss (P&L) incentive so that each of my divisions had a direct responsibility for controlling cost drivers, thus directly impacting a portion of the P&L for each division according to some portion of its actual medical costs. I would not, however, want to adversely penalise any one division because they had a large claim, which would be fairly unpredictable because of their size. The working layers of health care claims can be volatile as nearly two-thirds of next year s high cost claimants come from this year s low cost segment. A heart attack or cancer diagnosis could account for 10-15% of total costs for a 200-employee division. With our more credible population of 6,000 employees, these events are less than one half of one percent of costs and actuarially expected based upon population size. In order to not adversely impact any specific division due to a single large claim, I would create a stabilising fund or pool across my divisions. Each division would contribute to the pool annually so that it was adequately funded. Risk management maximised I would want my divisional managers to remain engaged in the corporate risk management programme to control long-term cost drivers. Making sure that divisional leadership was not sacrificing long-term cost containment for small short-term gains, I would incorporate P&L incentives for toeing the company line in regards to risk management. Risk management is a corporate investment and engagement from divisional managers and employees is required in order to realise a return on this investment. Further, each divisional manager benefits when all of the managers engage their employees and promote risk management as the total contributions to the stabilising fund would increase at a lower rate when we control claims drivers. I would review the available metrics which we use to gauge longterm cost containment to help determine the indicators used to ascertain each operating division s annual contributions to the stabilising fund participation in the health risk management programme, employee engagement level, and claims activity. The group captive continuum In a group captive programme, we build the same risk financing structure from the bottom up. That is 30 employers averaging 200 employees create the same credible population our re-imagined large company with 6,000 employees. A stop-loss group captive programme allows each employer (in our large company analogy, a division) to control costs by: Self funding their health plan risk; Buying stop-loss at a higher level around the captive than they could on their own that is, they purchase less insurance (transfer less risk), recouping insurance company profits; Promoting progressive risk management programmes creating a culture of health and wellness for their employees, with other like-minded employers i.e., toeing the same line; Maintaining an individual incentive to control medical costs in their self-funded layer (under the stop-loss); Managing long-term costs by participating in a stabilising fund (the first portion of stop-loss risk) and having a larger portion of cost increases dependent on the performance of the group captive and not the overall industry. Continuing with our re-imagined company analogy, how should each employer fund the captive stabilising fund (the risk sharing How would I change things if our 6,000-employee company, instead of having two or three divisions, had 30 distinct operating units averaging 200 employees each? layer) on an annual basis? The methodology employed is what gives each group captive its unique personality. It is tempting to set annual allocations in the captive (stabilising fund) strictly according to loss performance. While this placates the member who has a good year, we should remember that there can be a lot of volatility in medical stop-loss claims for mid-sized employers; this allocation methodology may not align with the goal of the group captive to reduce long-term insurance costs. To what 37 extent would the captive be rewarding luck instead of risk management initiatives that impact year-over-year trend increases? This structure also mirrors how the traditional stop-loss market operates. For mid-sized employers, buying traditional stop-loss is akin to providing carte blanche to divisional managers. In any given year, an employer (in our large company analogy, a division) may perform well, typically receiving trend increases negotiated down from the average industry leveraged trend, but when one of the unpredictable claims happens, as cited above, the employer can experience a significant increase in their health care costs. The net long-term increases equal leveraged trend plus carrier profits. A reaction is to drive down stop-loss cost increases by assuming higher deductibles; however, by doing so, employers assume more risk and ultimately realise significant increases in overall costs. Within a group captive that is underwriting traditional stop-loss renewals, employers might recuperate a portion of stop-loss premiums occasionally rewarding luck more than good risk management but also adversely penalising employers when they have had a bad year. The net effect may be a slight decrease in stop-loss costs at the expense of higher overall medical costs. The goal of the group captive programme should not be to simply recuperate stop-loss costs, but to impact stabilise and reduce overall medical costs. Moving from dividend eligible stop-loss to a better way to finance stop-loss. When running properly, the group stop-loss captive should target the reduction of long-term cost drivers, not just stop-loss premium increases. Long-term costs in the captive will outperform the stop-loss industry when expenses are in check, risk management programmes are effective and the group s claim performance outperforms industry averages. A process of banding renewal increases based upon a captive s unique recipe of metrics that focuses on long-term cost containment and recognises that large claims will happen, and they will eventually happen to everyone, is, in theory, a better way to manage long-term health care costs for the group captive and the individual employer. If group stop-loss captives are viewed as a re-imagined large company, then this goes beyond theory and follows the best financing models available. A path blazed by larger employers to achieve annual health care cost increases in line with US, not medical, inflation. Some food for thought.

5 Captive Design and Management Solutions E C A P T I V E M A N A G E R S C A P T I V E F E A S I B I L I T Y A N A L Y S I S A N D I M P L V I C E M S E R E N T A T I O N L L - F U 1 5 D O M I C I L E S A N G U I L L A B E R M U D A C A Y M A N H A W A I I N T V E R M O Rent-a-Captive Micro Captives Program Solutions Single-Parent Captives Bermuda Market Access Group and Association Captives Primary Office Locations Arizona Bermuda Cayman Hawaii Vermont artexinfo@artexrisk.com