Captives – what are they?

What is a Captive? A captive insurance company is simply an insurer owned by the insureds.

If you are an employer with over 100 employees and have decided to go the self-funded route, you may want to also consider a captive for your stop-loss coverages. Before we get into the components of a captive, we will briefly summarize, at a high level, self-funding versus fully insured.

Fundamentals of self-funding:

  • You retain a third-party administrator (TPA) to adjudicate and pay claims.
  • You rent a network for negotiated discounts on medical and a PBM (pharmacy benefit manager) for pharmacy claims (may be broken out).
  • You purchase stop-loss protection:
    1. Specific – protection against any one person’s claims exceeding a specific level (typically 5% to 10% of overall claims)
    2. Aggregate – protection against your overall claims exceeding a specific level. (typically 115% to 125% of projected claims)
  • You may consider other cost-containment/population health programs such as care-coordination, wellness programs, etc.

Fixed cost versus variable costs:

  • Fixed costs are costs you pay monthly and typically are fixed based on the number of employees per month (PEPM):
    1. Administration, Network fees, stop-loss coverages etc.
  • Variable costs are typically your claims costs and are paid as incurred.

Differences between self-funded and fully insured:

Unlike fully insured, where you pay a premium to the insurance carrier and whether your claims are higher or lower than your premium, that is what you pay. Self-funded plans typically cap the amount you would have to pay monthly (aggregate attachment point/12) and if your claims are less than projected you keep the savings. Usually, this cap is 5% to 25% more than your fully insured premium.

There are many other considerations for self-funded programs such as the contract coverage timeframe (i.e. claims that are incurred but not yet reported or paid), terminal liability options if you were to leave the self-funded arrangement, and others; but, for the sake of this article, we will forgo delving into those provisions.

So, how does a captive work with self-funded medical coverages?

Typically, the captive is utilized to purchase the stop-loss coverages discussed above (specific and aggregate). Some of the advantages (especially for mid-market 100 to 1000 employee employers) are; buying power and claims predictability, possible underwriting profits, and other risk layering.

Buying power – Since most captives insure numerous employers, you can use the collective buying power of a much larger group of covered lives. This brings into play the “Law of Large Numbers” and the predictability associated with it (i.e. less volatility). Underwriters love predictability.

Underwriting profits – Most stop-loss carriers have relatively low medical loss ratios and in years when the captive performs well, the captive members may share in some of the savings.

Risk layering – many captives have a risk layer below a purchased stop loss amount. This risk layer is shared by the members of the captive and is usually proportionate to their premium amounts. Example: Employer takes risk up to $10,000, shared risk pool is from $10,001 to $499,999, and re-insured risk is $500,000+.

There are many other factors related to the decision to utilize a group captive for your medical program, and other alternative structures may be a better solution for your unique situation, goals and needs. VADA Benefits and Insurance can help you understand all of your options and assist you in making the right decision for you and your employees.

For more information, contact VADA Benefits and Insurance HERE

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