Funding Medical Stop Loss through Cell Captives John Cassell & Randall Martin Monday, March 13 @ 11am
Overview of Healthcare Market Fueled by the rising cost of healthcare and the complexities associated with the implementation of the ACA, more midmarket employers are looking at selffunding as an option While medical stop-loss captives have enjoyed niche-level popularity for several years, they have now become one of the fastest growing coverage segments in the alternative risk market Data Source: QBE Medical Stop-loss white paper 2016 CICA Captive Market Overview - 2015 Medical stop-loss is one of the fastest growing coverage segments in the alternative risk market
Captive Market Trend Split of Total P&C Premiums Split of Total Healthcare Premiums Captive Premiums 30% ($98 Billion) Non-Captive Premium 70% ($228.9 Billion) Fully-insured Premiums 40% Self-Funded Premiums utilized in a captive 12% Self-Funded Premiums not flowing through a captive 48% Data Sources: Conning: MarketStance analysis; Insurance Information Institute Captive Insurance Companies Association Captives have been used for P&C risks for many years they account for about 30% of the total annual commercial P&C market premiums; Using captives for employee benefits including healthcare is a fast growing phenomena
Cell Captives Insures the owner s risks or risks of a third party Allows more distinct segregation of risks into accounts or cells from a legal and financial perspective A legal entity, set up by a sponsor, which is divided up into individually cells that are rented out by the sponsor to companies or groups who want to use a captive cell to fund their risk Sponsor manages the cell s day-to-day activities, allowing cell owners to avoid a lot of the corporate and administrative resources typically required for a captive insurance or reinsurance company Cell A Sponsor Cell Captive Cell B Cell C Experience of different cells do not impact other cells
Who Uses Cell Captives? For companies that: Don t have an existing captive Aren t large enough for a stand-alone medical stop-loss captive to make sense Aren t interested in forming or joining a group captive
Benefits of Cell Captives Easy entry into funding risk Economies of scale Professional captive management
4 trends are causing many employers to reconsider their stop-loss options: Healthcare reform Increasing costs Lazered coverage Regulatory environment Recent Trend Towards Medical Stop-Loss Captive Funding Deciding to insure medical stop-loss and fund it in a captive has proven to be a great way for employers who self-fund their health coverage to add a layer of protection from excessively high individual or aggregate health claims and meet ACA requirements.
Medical Stop-Loss Refresher Captive Risk Structure An illustration Self-insured savings Savings from Stop-loss captive premium Premiums Stop-Loss Captive Stop-loss Stop-Loss in a captive can save 10%-30% Claims Claims Admin Admin Commercial Fully-Insured Commercial Self-Insured Captive
Medical Stop-Loss in a Captive Why? Coverage in a captive can: Be customized to meet unique needs Become a platform for loss control techniques to improve health and wellbeing (i.e. wellness, utilization review, large case management, telemedicine etc.) Give access and risk distribution to smaller members Provide relief/dependence on commercial market cycles & margins Promote long-term price stability and cost-savings potential Create a purchasing forum for addressing future needs
Medical Stop-Loss Captives: Key Goals and Objectives Many organizations have self-insured medical coverage for employees and dependents, with stop-loss coverage protecting against large claims, for example: Specific stop-loss attaching at $300,000 per claimant Aggregate stop-loss attaching at 125% of expected total claims Key objectives in exploring including medical stop-loss in a captive include, but may not be limited to: Assessing the productivity and efficiency of their stop-loss program offered to its members to determine if adjustments should be made Reducing cost of insurance programs over time Lessening dependence on traditional insurance and shifts in market Improving cash flow and more efficient loss funding
The Medical Stop-Loss Transaction Direct Insurance Company Company pays premiums to Captive Captive insures Company exposure and pays claims Captive Captive pays premiums to a Reinsurer Reinsurer pays claims Reinsurance The captive can write this policy directly
Aggregate Claims Sample Program: Specific Stop-Loss in a Captive Employer Self Insured Retention (SIR) Level Captive Commercial Market The captive holds reserves for the employer to pay individual claims over each member s retained risk SIR Employer retains some risk to reduce their overall costs Individual Claims $300,000 $600,000 The captive provides a secure way to self insure health risks Typical savings are 5% to 20% of premium
Aggregate Claimant Risk Specific and Aggregate Stop Loss Risk Structure Optional: Captive (excess of 125% of Member expected SIR) Reinsurance (excess of 125% of expected Captive claims) Member SIR (e.g. $75k per claimant, up to 125% of expected Captive (e.g. next $425k per claimant Reinsurance (excess $500k per claimant) Specific Claimant Risk
EIS Member Case Studies: Traditional Stop-Loss and Retiree Long-Term Stop-Loss
Energy Insurance Mutual Limited Mutually owned insurer Founded 1985 Domicile Barbados Licensed in Florida Head-office Tampa 162 Members in USA & Canada Mission: To provide members with a financially sound organization offering a secure, stable source of superior long-term insurance and risk financing products and services www.eim.com
Energy Insurance Services, Inc. Wholly-owned subsidiary of EIM Protected Cell Captive Founded 1992 (Bermuda) Re-domesticated to SC 2006 14 active protected cells Mission: To provide a facility that would meet EIM Member's specific and dynamic business requirements for the placement and management of alternative risk related products.
Medical Stop-Loss Solution The EIS participant covers the specific layer of stop loss to $500K and the aggregate attaching at the 125% for approximately 2,500 employees The stop loss market continued to increase prices every year although the client had no losses The cell layer will provide coverage until the portfolio aggregate stop-loss protection is hit The EIS participant will contribute capital equal to 25% of expected captive layer claims Each year, appropriate excess reinsurance coverage and pricing is determined
Medical Stop-Loss Solution Annual program costs are approximately 12% of captive premiums, and include the following services: Captive Management and Claim Adjudication Audit and Legal fee Captive Management Captive Rental Fee Outsourced Services Pricing Reserving Financial Projections Risk management, including captive re-insurance and risk retention Captive management Aggregate portfolio protection
Retiree Healthcare Economic Pressures 1 2 3 4 5 6 Retiree costs increase Budget pressures Credit rating agency concerns Aging workforce with baby boomers approaching retirement Sizable unfunded OPEB liabilities Healthcare reform
Employer Effort and Costs Employer s Changing Strategy Status Quo As Is Maintaining - Reducing Costs Through Plan Design Supporting Access Only Group Pricing or Exchanges Likely hood Eliminating Low Retiree Engagement High
The EIS Solution Energy Insurance Services has a dedicated protected cell that writes reimbursement policies for retiree medical plans Benefits covered are pre-65 and post-65 medical and Rx benefits The policies are called Non-cancellable Accident & Health policies, and are treated as life insurance for tax purposes and work like long term stop loss The policies reimburse individual members VEBAs for a portion of incurred retiree medical claims
The Transaction A participating VEBA will purchase a Non-cancellable Accident & Health policy from EIS domiciled in South Carolina The VEBA is the policyholder, owner and the beneficiary. The insureds are the employees. The VEBA holds the insurance policy as an asset. VEBAs are separate taxable entities that are established for the benefit of employees. By its design, the assets of the trust cannot revert to the employer but must be used for the benefit of employees.
How The Retiree Medical Programs Work Company 1 Company contributes funds to its VEBA Trust VEBA Trust 4 Assets are invested in marketable securities, and the EIS PC reimburses the VEBA based on actual claims 3 EIS/PC 2 The VEBA Trust purchases insurance from EIS/PC
Benefits of the Program VEBAs offer a tax favored employee benefits pre-funding mechanism Earnings of a VEBA for funding retiree medical and dental may be subject to Unrelated Business Income Tax (UBIT) if the assets are attributable to nonunion retirees If the VEBA purchases Long Term Stop Loss (a Non-cancellable Accident & Health policy is treated a life policy), the earnings are tax sheltered if held until the liabilities are fulfilled It provides a ribbon of coverage to each participant s VEBA
Retiree Medical Claim Components $4,500 $4,000 $3,500 Over $1,600 Max 80% Insurance 20% Coinsurance $500 Deductible $3,000 $2,500 $2,000 $1,500 Utilities have saved millions! $1,000 $500 $0 $0 $400 $800 $1,200 $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
About John Cassell John Cassell is the Senior Partner at Spring Consulting Group. He is responsible for the strategic focus of the firm and for corporate development. John has over 25 years experience in the health care and financial services sector. John is a regular speaker at industry conferences and has contributed articles and papers to a number of publications and journals. He is an associate of the Royal Society of Medicine. Previously, John was a partner in Watson Wyatt from 1997-2003. During this time, he set up and ran the employer health care consulting practice in the UK and headed health care industry consulting globally. Most recently he was Executive Vice President of Watson Wyatt s US Insurance and Financial services consulting practice.
About Randall Martin Randy began a career in insurance and risk management with the Aetna Casualty & Surety company immediately upon graduation from college as a commercial property and liability underwriter. From there he held several positions with other large insurers and brokers. In 2000, he left Willis to assume a newly created role in the Risk & Insurance Department of American Electric Power (AEP). AEP is one of the largest electric power utilities in North America. During the last half of his 16 years with AEP, he was the Managing Director of the Risk & Insurance Department. Throughout his time at AEP, he was highly engaged in the utilization of a protected cell within Energy Insurance Services, Inc. With these years at AEP and 5 years at Borden, Inc. his captive insurance experience spans over 21 years. In October 2015 upon his retirement from AEP, Randy assumed the current position he holds with Energy Insurance Services, Inc. Randy received his Bachelor of Science Degree in Business Administration majoring in Finance at West Virginia University.
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