Introduction to STOP LOSS CAPTIVES

Transcription

1 Introduction to STOP LOSS CAPTIVES Colorado State Association of Health Underwriters Luncheon June 6, 2017 Presented by: Tony Minnich Tokio Marine HCC Captive Underwriting and Sales Lead

2 What is a Stop Loss Captive? Why would I want to advise my employer clients to join a captive? 2

3 Basic Goals of a Stop Loss Captive v Profit Distribution to Employers v Lower Fixed Costs increases v Moving Small to Mid-Size employers to selffunding while avoiding the volatility v Employers reap benefits of paying their own claims without insured admin costs v Help smaller employers take control of their data 4

4 IT ISN T ROCKET SURGERY Property & Casualty Captives have been around for decades. They are often complex, with many moving parts and long tails. Stop Loss Captives are much simpler. 4

5 Let s examine the available structures of Stop Loss Captives 5

6 Should a Stop Loss Captive Include Aggregate Risk? Specific & Aggregate Risk Captive v All risk and premium exist in the captive. v Increased amount of premium in the captive. v The risk of an aggregate claims is minimal. Specific Only Risk Captive v Only premium and risk in the captive is specific risk. v Aggregate premiums are typically very small. v Agg premium added is disproportionate to the risk added, however unlikely an agg claim may be. v Relying on claims pick of underwriter, often without solid claims experience. 7

7 Specific and Aggregate Coverage Stop Loss Captive Example 7

8 Specific Coverage Only Stop Loss Captive Example 8

9 Floating Captive Layer vs. Captive Deductible Floating Captive Layer v Each employer chooses their own specific deductible based on their own risk tolerance. v Captive layer is the same above each specific deductible. v Employers of varying sizes can participate in the same captive while sharing similar risk. Captive Deductible v Employers can choose their own deductible, often within a limited, defined range. v Captive shares risk up to a predetermined amount regardless of underlying specific deductibles. v Better suited for employer of similar size in order to share similar risk. Smaller groups carry more risk. 10

10 Floating Layer vs. Captive Deductible Examples 10

11 Producer Centric Cell vs. Incubator/Multi-Broker Cell Producer Centric Cell v Producer (broker/tpa) is what makes cell homogeneous. v Producer controls structure of cell as well as entrance requirements, most aspects of the captive cell. v Gives Producer control of top performing groups long term. v Requires several employers from the same producer. Incubator/Multi-Broker Cell v Captive manager is what makes cell homogeneous. v Many different brokers have access to the cell. No connection between brokers is necessary for access. v Brokers are able to add one employer at a time to the cell. v Captive manager controls the cell: structure, entrance requirements, access, vender selection. 12

12 Who are the players in a Stop Loss Captive? Employer Producer Captive Manager Stop Loss Carrier Wellness Partner Reinsurer Bank Claims Administrator Human Resource s 13

13 Let s walk through the fine print and details of a Stop Loss Captive 13

14 Underwriting and Pricing Is there a difference between pricing for a standard self-funded case and a stop loss captive? v Ideally, an underwriter will price a case intended for a captive identically. v Concern is that the underwriter will underprice captive layer to win business, which is not in captive s best interest. v Data required for a captive proposal should be the same as for a standard stop loss RFP. 14

15 Stop Loss Captive vs. Aggregate Specific Deductible Stop Loss Captive v Captive experience as a whole is what matters, not individual case experience. v Many captives will give profit distribution to all employers even those with poor claims. v Any profit distribution is received after the cell is closed there is no up-front financial incentive. Aggregate Specific Deductible v Individual employer experience is what matters. v If an employer does not run well, they will not receive financial benefit it will cost the same as standard stop loss with no fixed cost help. v Premium savings are seen up-front and the employer doesn t have to rely on the claims experience of others. 16

16 Captive Pricing Example 16

17 Captive Premium Breakdown Gross Stop Loss Premium $2,000,000 Gross Ceded Premium (GCP) $1,000,000 Captive Fees (14.725%) $147,250 Net Ceded Premium (NCP) $852,750 Collateral Required to Securitize Captive (25% of GCP) $250,000 Max Liability of Captive (125% of NCP) $1,065,938 Premium for Captive Aggregate (3% of GCP) $30,000 17

18 Claim example: $500,000 claim, $50,000 Spec; $150,000 Captive Reinsurance Layer above Captive Layer covering remainder of the claim using non-ceded stop loss premium. $300,000 (remainder of claim) Captive Layer above Specific Deductible, below Reinsurance Layer paid using ceded stop loss premium. Employer Layer under Specific Deductible $150,000 (the most the captive can pay on any one claim.) $50,000 (Each employer may choose their own Spec Level) Single large shock claim 18

19 Captive Claim Example Captive Aggregate v Captive Risk is limited to 125% of Net Ceded Premium. v TMHCC provides Captive Aggregate policy which covers any captive claims beyond 125% of Net Ceded Premium. v Employer s collateral covers the gap between the end of the Net Ceded Premium and the beginning of the Captive Aggregate. Aggregate Captive Claims Captive Aggregate provided by HCC Life Collateral From Employers Net Ceded Captive Premium Used to Pay Claims 19

20 What makes an ideal stop loss captive employer? v Good experience history: low frequency of claims above specific deductible. v 50 to 500 employees, fully insured or self-funded v Single owner/decision maker v Most industries are good Non-profits and public entities tend not to work in stop loss captives v Proper mentality: tolerance of risk, incentivize employees, financially sound. 20

21 Benefits of a Stop Loss Captive for Brokers and Carriers v Brokers: increased client retention of topend employers. v Brokers: potential increased revenue. v Carrier: less risk, better chance of profitability on the excess layer v Carrier: long term employer retention 21

22 Questions? Please contact: Tony Minnich (763) office