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Evolving Role of Captives Within the New Health Care Reform Reality
A document discusses the evolving role of captives within the changing healthcare environment. It notes rising healthcare costs and the growth of accountable care organizations (ACOs) and self-insurance. Captives are increasingly being used to manage ACO and employee healthcare risks. Case studies show how group captives can generate savings for employers by pooling stop-loss insurance and improving risk management. Forming a successful captive requires thorough planning and establishing sound fundamentals.
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Evolving Role of Captives Within the New Health Care Reform Reality
- 1. Proprietary and Confidential ยฉCopyright2013 Spring Consulting Group, LLC. All rights reserved LinkedIn: spring-consulting-group-llc Twitter: @SpringsInsight The Evolving Role of Captives: Within the New Health Care Reality The Symposium on Captive Insurance in Connecticut October 2, 2013
- 2. 2 Content ๏ฎ Current State ๏ฎThe Healthcare Environment is Ripe for Change ๏ฎ Captives 201 ๏ฎ Creation of a Captive ๏ฎ Case Studies
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- 4. 4 Healthcare Cost Escalation AverageAnnual Premiums for Single and Family Coverage, 1999-2012 Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012. * Estimate is statistically different from estimate for the previous year shown (p<.05). $15,745 $15,073 $13,770 $13,375 $12,680 $12,106 $11,480 $10,880 $9,950 $9,068 $8,003 $7,061 $6,438 $5,615 $5,429 $5,049 $4,824 $4,704 $4,479 $4,242 $4,024 $3,695 $3,383 $3,083 $2,689 $2,471 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Single Coverage Family Coverage
- 5. 5 The Affordable CareAct and ACOs ๏ฎ Established in 2010 to: ๏ฌ Promote accountability for patient population ๏ฌ Encourage investment in infrastructure ๏ฌ Increase quality and efficiency of service delivery through redesigned care processes ๏ฌ Coordinate services under Medicare part A and B ๏ฌ Rewards ACOs if their overall costs per registered patient are less than average Medicare beneficiary in geographic area in a given year Value Based versus Volume Based Purchasing Model Goals: Better Health, Lower Costs, Outcomes Based Shared Savings
- 6. 6 ACOs and Captives ๏ฎMany looking at ACO risk as part of captive programs ๏ฌ Allow providers to share in cost savings generated by ACOโs per-capita costs limit โ Captive would also be responsible for equitable distribution of savings to ACOโs providers โ Captive stop loss for providers ๏ฌ Help manage the financial risk like the medical malpractice risk exposure by providing collaboration in defending medical malpractice allegations ๏ฌ Provide controls to help reduce medical error and support single focus Increasing use of captives to manage risk! Starting with Employee Population
- 7. 7 A Trend TowardSelf-Insurance ๏ฎ Control medical cost inflation ๏ฎ Avoid Impacts of ACA additional taxes and fees: Health Insurance Industry Fee of 2-2.5% in 2014 and 4% in 2015 on fully-insured groups โโฆgroups between 51 and 100 employees are more likely to self- fund in greater numbers when they become subject to the small group market reform rules in 2016โ RWJ - Factors A๏ฌecting Self-Funding by Small Employers; April 2013 โ82 percent of employers have experienced a growing level of interest in self- funding their group health insurance plans over the past 12 months, 32 percent stating that interest has increased โsignificantlyโโ Munich RE: Business Wire, April 15, 2013 52% 54% 54% 55% 55% 55% 57% 59% 60% 60% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Growth of Self-funded Plans (All Employers) Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2012.
- 8. 8 Stop Loss ina Captive Captive Reinsurer The captive provides a secure way to self insure health risks The captive protects itself from excess claims by buying cover from an outside reinsurer for individual claims and total claims that could exceed 125% of expected The captive holds reserves for the employer to pay individual claims over each memberโs retained risk SIR 125% of Expected Claims Employer Self Insured Retention (SIR) Level Individual Claims AggregateClaims $250,000 Employer retains some risk to reduce their overall costs
- 9. 9 The Healthcare Environmentis Ripe for Change
- 10. 10 Reasons Captives areon the Rise ๏ฎ Growth of employee benefits captive a result of: ๏ฌ Insurance needs ๏ฌ Health care reform and other legislative changes ๏ฌ Business, financial and tax considerations ๏ฌ Lack of confidence in traditional insurance companies ๏ฌ Increase in specialist consultants with turnkey solutions ๏ฌ Brokers see captives as a way of retaining clients and increasing margins by participating in the risk ๏ฌ More domiciles with more flexible captive legislation Market pressures will continue to force employers of all sizes to search for creative alternatives to traditional insurance products.
- 11. 11 Trends in CaptiveUse for Benefits ๏ฎ New captive formations and expansion of existing captives ๏ฎ Greater domicile choice ๏ฎ Increased funding of unrelated / 3rd party risk ๏ฌ Truly unrelated ๏ฌ Employee benefits a major investment for many companies ๏ฎ Post-retirement costs in Europe and US are becoming critical issues where captives are a solution ๏ฌ Pensions ๏ฌ Retiree medical ๏ฌ Stop loss ๏ฎ Expanded rent-a-captive or segregated cell captive use ๏ฎ Employee benefits are now a major investment for many companies ๏ฎ Companies are now seriously looking at captives as a funding vehicle for benefits as blue chip organizations take the lead
- 12. 12 Then vs. Now:What has changed? Captives were rarely used: ๏ฎ Perceived obstacles ๏ฌ Reinsurance restrictions ๏ฌ Territorial restrictions, (i.e. US only) ๏ฎ Relatively few employee benefits reinsured by captives ๏ฎ Limited HR familiarity with captives ๏ฎ Insurer reluctance ๏ฎ Alleged marginal economics ๏ฎ More people involved: ๏ฌ HR, Finance and Risk agendas ๏ฌ Everyone knows about it ๏ฎ Consolidation of risk financing ๏ฎ Network restructuring and changes not aligned with growing market ๏ฎ Viewed as the next step in cost savings and control ๏ฎ Active management increasing: ๏ฌ Communications ๏ฌ Formal guidelines ๏ฌ Annual review and changes ๏ฌ Quarterly claims management What does this mean? Captives represent an emerging growth area! Ten Years Ago Now
- 13. 13 ๏ฎ Case forself insurance is stronger ๏ฌ Generally, stop loss coverage allows: โ More flexibility of plan design (ERISA vs. state laws) โ Control medical cost inflation โ Access to data not available with fully insured plans which translates into the ability to make targeted changes ๏ฌ PPACA provides even more incentives: โ Avoid Impacts of ACA additional taxes and fees Consider how your risk pool may change due to PPACA. Fully insured groups need to spread costs. The Environment is Ripe for Change
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- 15. 15 Captives are GenerallyEstablished to Insure or Reinsure Risk Direct Insurance Parent Captive Parent pays premiums to captive Captive insures parent exposure and pays claims Reinsurance Parent Captive Parent pays premiums to the front Front insures the captiveโs parent exposure and pays out claims Insurance Company The front reinsures the program with the captive The captive pays fronting fees and claims Structure is important. Stop loss within a captive is not first dollar coverage.
- 16. 16 Types of Captives ๏ฎSingle Parent (Pure) ๏ฎ Group ๏ฌ Risk Retention Groups ๏ฌ Association ๏ฎ Agency (Broker Owned Captive) ๏ฎ Rent-a-captive or cell facilities
- 17. 17 Who Should Considera Captive? Companies with. . . ๏ฎ Good risk management ๏ฎ Long term commitment ๏ฎ Financially sound ๏ฎ Driven by an interest in financing assumed risk positions ๏ฎ Reasonably predictable insurance risk Should not consider, if . . . ๏ฎ Poor risk management / high loss ratios ๏ฎ Short term outlook or price driven ๏ฎ Financially weak ๏ฎ Highly volatile or catastrophic exposures without the support of stable lines
- 18. 18 U.S. Employee BenefitOfferings Retirement Health Security Time Off Voluntary Vacation Financial ProductsHolidaySTD1 Drugs Defined Contribution Sick Leave Mortgages Investment Funds Fringe Training, Education Assistance Transportation FSA3 Legal, Financial Planning Dental Other Leave Health & Welfare Pension ๏ Post-Ret Life๏ Post-Ret Medical ๏ Medical (Stop Loss) ๏ Life Ins. ๏ LTD2 ๏ Workersโ Compensation ๏ Auto/homeowners Insurance ๏ Life Long Term Care ๏ 1 Short Term Disability 2 Long Term Disability 3 Flexible Spending Accounts 4 Employee Assistance Programs (mental health, legal assistance, etc.) Multinational Pooling, Expatriate Global Assistance ๏ Prevention, Disease Mgmt ๏ ๏ ๏ ๏ ๏ ๏ ๏ Critical Illness EAP 4, Work/Life Executive Benefits Typical Non-ERISA Typical ERISA Plans ๏ ๏ ๏ ๏ ๏ = Typical Captive Programs
- 19. 19 Employee Benefit CostSavings Using Captives Program Estimated Savings* Frictional Costs Active medical stop loss 10% - 12% Cost of stop loss Term life insurance 10% - 15% Commercial insurance Retiree medical 3% - 15% Accumulated Post-Retirement Benefit Obligation Long-term disability 15% - 25% Commercial insurance On self-insurance, accelerated deduction of claims cost and tax effective investment accumulation on reserves Multinational pooling 10% - 15% Commercial insurance Executive benefits โ Deferred compensation COLI Split dollar replacement 10 + % Net cost resulting in higher yield on investments * These are typical savings that our clients have experienced in the past; actual performance may vary Other advantages are similar to property/casualty captive funding e.g., broader coverage, stability against market fluctuations, improved service, direct access to reinsurers, and increased control
- 20. 20 Reinsurance (Stop-Loss) LOSS FUNDS Retained byCaptive Expected Paid Loss Retained by Business Unit Expected Loss $ Max Determined Paid to Reinsurer Risk Transfer for Aggregate Loss Protection Loss Funding - good loss experience stays with captive, PREMIUMS Loss Funds into Captive Long-Term Strategies: 1. Grow LOSS FUNDS by retaining and managing more risk in the captive, lessen dependency on other insurance over-time 2. Accrue value in the captive Operating Costs How Stop Loss Captives Work How Losses Are Paid OutWhere Premium Goes Loss Funding Expected losses paid by Captive DeductibleLoss Fund for SI Layer
- 21. 21 Why are OrganizationsInterested in Stop-Loss Captives? ๏ฎ Existing P&C captives and can be extended to other employee benefits ๏ฎ Could improve tax efficiency of existing captives ๏ฎ May be used when multiple employer welfare arrangement (MEWAs) and other group stop loss structures are prohibited or require more capitalization ๏ฎ Allows heterogeneous entities or smaller organizations to pool coverage ๏ฎ The costs of forming a captive are able to be spread out among all of the participants ๏ฎ The risk per participant is lower ๏ฎ New lower cost captive structures plus current approval precedents make access easier Medical stop-loss captives allow self- funded employers to pool excess medical claim costs with other companies to facilitate the purchase of stop loss coverage with higher attachment points, thus effectively lowering the cost of coverage and effectively controlling their health cost expenditure
- 22. 22 Key Considerations WhenForming a Captive Captive Type โข Pure โข Group โข Fronted โข Direct โข Cell โข Rental Captive Legal Structure โข Stock โข Mutual โข Reciprocal Domicile โข Capital and Surplus โข Financial ratios โข Minimum attachment points Tax Issues โข Deductible premiums โข Insurance accounting โข Deposit accounting โข Accelerated deduction Regulatory Compliance โข Financial metrics โข Record keeping ๏ฎ Human Resources ๏ฌ Same carriers and networks ๏ฌ Access to transparent data ๏ฌ Expert support for health data/trends, health reform and legal issues ๏ฎ Employees ๏ฌ No noticeable change ๏ฌ Minor and seamless transition of services ๏ฌ Improved employee support services Staff Impact
- 23. 23 Control โข Premium volatility reduced viaclaims pooling and large scale PROGRAM STRUCTURE โข 5-8 custom health plans โข Best in class health management and wellness โข 1-2 carriers โข Full data analysis for management/benchmarking โข Active member involvement in decision-making and design One Central Point of Contact โข Enrollment โข Billing โข Employee interface โข Employer data Transparency โข Financial and performance data โข No hidden costs Buying Power โข Creates cost savings that increase as the group expands Flexibility โข Select plans โข Select employee contribution โข Maintain existing broker relationships Choice โข Members can choose to self insure some of their own risk to save cost Group Captive Program Development
- 24. 24 Health & ProductivityManagement Funding Group Captive Program Development Founder Employer Group Additional Participants Health Insurance Funding Improved Risk Mgmt Bulk Purchasing Other Risks โ Life Disability Retiree Health Pensions Life Performance Measurement Healthier, More Productive Employees Improved Benefits Value and Cost Management ROI Measurement Continuous Improvement Tighter Controls and Risk Management Health Management Initiatives Wider Health and Wellness Initiatives In House Primary Care Health and Disability
- 25. 25 Creation of aCaptive
- 26. 26 The Fundamentals mustbe Sound Effective Captive Program Understanding of Risk Profitability over Time A Sound Business Plan Access to the Right Insurance Markets Good Analytics Expert Management
- 27. 27 How to Establisha Captive ๏ฎ Conduct a feasibility study ๏ฌ Loss history ๏ฌ Risk/reward discussion (potential benefits) ๏ฌ Minimums: solvency, capital requirements, premiums ๏ฌ Ownership options ๏ฌ Financial analysis ๏ฌ Legal: DOL requirements, taxation, and incorporation ๏ฎ Actuarial review ๏ฎ Select partners ๏ฎ Incorporation ๏ฎ Captive licensure ๏ฎ Capitalization ๏ฎ Reinsurance / insurance contracts ๏ฎ Service provider agreements ๏ฎ Seek DOL approval if necessary; but it may not be necessary
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- 29. 29 Case Study 1:Group Captive Feasibility Study โข 25 employers with approximately 9,000 total employees spend $110M per annum on health insurance Organizations โข By funding their stop loss health insurance through a captive, the group will conservatively save over $6M Situation โข 5 year net present value savings exceed $30M โข Additional savings are anticipated from: โข Better health management โข Reduced reinsurance costs โข Further savings on administration Anticipated Results
- 30. 30 Case Study 1:Group Financial Projection Representative Sample 25 employers 9,800 employees Full population 60 employers 100,000 employees Spending $110M on health insurance Spending $1.2B Conservative 2011 savings 4% - 9% depending on group Savings of $180M - $250M per year - improved with volume Projection Impact of Captive Impact of Captive Results are pending first year review in 2014!
- 31. 31 Case Study 2:Pure Captive โข Global food distributor with 60,000+ employees Organization โข Offshore property/casualty captive already in place โข Opportunity to fund its otherwise unfunded liability โข Interested in integrating disability and workersโ compensation โข Leveraged current stop loss program to incorporate additional premium volume; considered direct and fronting placement Situation โข Reduced reinsurance costs โข Further savings on administration โข Capture investment income Anticipated Results
- 32. 32 Case Study 2:Results Line of Coverage Captive Savings ($$) Retiree Medical 22% of the liability over ten years Long Term Disability Stop Loss 21% of the existing premium Medical, Dental and Vision Stop Loss 8% of the existing premiums
- 33. 33 Questions and ContactInformation Karin Landry Partner Spring Consulting Group, LLC Phone: 617-589-0930 Karin.Landry@springgroup.com Teri Weber Partner and Senior Consultant Spring Consulting Group, LLC Phone: 617-818-3148 Teri.Weber@springgroup.com
Editor's Notes
- #3ย Take you on a journey and will cover:The current stateCaptives โ what they are, what they do, and their benefitsHow to create themDiscuss a few case studies and wrap-up with some trendsA captive is creating your own insurance company.
- #8ย Fully-insured employers are expressing more of an interest in self-fundingReasons include:Greater control of plan designAvoid taxes โ state and federalCapture marketing and retention fees from insurance carriersAccess and greater transparency of dataAs we see the ACA taxes on full-insured groups increase to the 3-4% projected in 2014 and beyond these numbers will continue to increase.There is another solution to consider: creating and insurance captive.
- #9ย TW
- #14ย Fully-insured employers are expressing more of an interest in self-fundingReasons include:Greater control of plan designAvoid taxes โ state and federalCapture marketing and retention fees from insurance carriersAccess and greater transparency of dataAs we see the ACA taxes on full-insured groups increase to the 3-4% projected in 2014 and beyond these numbers will continue to increase.There is another solution to consider: creating and insurance captive.
- #17ย Other funding types;Self-insurance trustFrontedNon-admitted direct writeIRC 831(b) โ small captives
- #18ย Captives are not for everyone.
- #22ย Captive have been around for a long time. Some believe that captives had their beginnings when ship owners met at Lloyd's coffee shop in London and agreed to share in the risks of their shipping fleet losses.Some of the reasons captives have gained in popularity since the 50s are:
- #23ย This slide provide an example of what a group captive structure may look like.Buying Power โ the group has great leverage.Administrative Issues are handled through a single point of contactVolatility is reduced via claims pooling and larger scaleChoice to self-insurePrice and cost transparencyFlexibility on plan pricing
- #25ย Health insurance: short tail line of coverageHas some volatility associated with it on an individual basisERISA pre-empts state laws and most employers greater than 500 employeeโs self insure their healthTherefore, the need for stop loss is importantEmployer saves money through pooled purchasing power on the administration sideReduces the need for captive to purchase reinsurance protectionProvides joint fixed costs savingsProvides joint management of first dollar claims