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Proprietary and Confidential©Copyright 2013 Spring Consulting Group, LLC. All rights reserved
LinkedIn: spring-consulting-group-llcTwitter: @SpringsInsight
The Evolving Role of Captives: Within the New Health Care Reality
The Symposium on Captive Insurance in ConnecticutOctober 2, 2013
2
Content Current State The Healthcare Environment is Ripe for Change Captives 201 Creation of a Captive Case Studies
3
Current State
4
Healthcare Cost Escalation
Average Annual 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).
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$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
Single CoverageFamily Coverage
5
The Affordable Care Act and ACOs Established in 2010 to:
Promote accountability for patient population Encourage investment in infrastructure Increase quality and efficiency of service delivery through
redesigned care processes Coordinate services under Medicare part A and B 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
ACOs and Captives Many looking at ACO risk as part of captive programs
Allow providers to share in cost savings generated by ACO’s per-capita costs limit― Captive would also be responsible for equitable distribution of
savings to ACO’s providers― Captive stop loss for providers
Help manage the financial risk like the medical malpractice risk exposure by providing collaboration in defending medical malpractice allegations
Provide controls to help reduce medical error and support single focus
Increasing use of captives to manage risk!
Starting with Employee Population
7
A Trend Toward Self-Insurance
Control medical cost inflation 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
“…groups 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 2016”RWJ - Factors Affecting Self-Funding by Small Employers; April 2013
“82 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 ‘significantly’”
Munich RE: Business Wire, April 15, 2013
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
52%
54% 54%55% 55% 55%
57%
59%60% 60%
Growth of Self-funded Plans(All Employers)
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2012.
8
Stop Loss in a 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 member’s
retained risk SIR
125% of Expected Claims
Employer Self Insured
Retention
(SIR) Level
Individual Claims
Agg
rega
te C
laim
s
$250,000
Employer retains some risk to reduce their
overall costs
9
The Healthcare Environment is Ripe for Change
10
Reasons Captives are on the Rise
Growth of employee benefits captive a result of: Insurance needs Health care reform and other legislative changes Business, financial and tax considerations Lack of confidence in traditional insurance companies Increase in specialist consultants with turnkey solutions Brokers see captives as a way of retaining clients and
increasing margins by participating in the risk 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
Trends in Captive Use for Benefits New captive formations and expansion of
existing captives Greater domicile choice Increased funding of unrelated / 3rd party risk
Truly unrelated Employee benefits a major investment for many
companies Post-retirement costs in Europe and US are
becoming critical issues where captives are a solution Pensions Retiree medical Stop loss
Expanded rent-a-captive or segregated cell captive use Employee benefits are now a major investment for many companies Companies are now seriously looking at captives as a funding vehicle for
benefits as blue chip organizations take the lead
12
Then vs. Now: What has changed?
Captives were rarely used: Perceived obstacles
Reinsurance restrictions Territorial restrictions, (i.e. US
only) Relatively few employee benefits
reinsured by captives Limited HR familiarity with captives Insurer reluctance Alleged marginal economics
More people involved: HR, Finance and Risk agendas Everyone knows about it
Consolidation of risk financing Network restructuring and changes
not aligned with growing market Viewed as the next step in cost savings
and control Active management increasing:
Communications Formal guidelines Annual review and changes Quarterly claims management
What does this mean? Captives represent an emerging growth area!
Ten Years Ago Now
13
Case for self insurance is stronger Generally, stop loss coverage allows:
― More flexibility of plan design (ERISA vs. state laws)― Control medical cost inflation― Access to data not available with fully insured plans which
translates into the ability to make targeted changes PPACA provides even more incentives:
― 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
14
Captives 201
15
Captives are Generally Established 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 captive’s 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
Types of Captives Single Parent (Pure) Group
Risk Retention Groups Association
Agency (Broker Owned Captive) Rent-a-captive or cell facilities
17
Who Should Consider a Captive?
Companies with. . . Good risk management Long term commitment Financially sound Driven by an interest in
financing assumed risk positions
Reasonably predictable insurance risk
Should not consider, if . . . Poor risk management /
high loss ratios Short term outlook or
price driven Financially weak Highly volatile or
catastrophic exposures without the support of stable lines
18
U.S. Employee Benefit Offerings
Retirement Health Security Time Off
Voluntary
VacationFinancialProductsHolidaySTD1
DrugsDefinedContribution
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
Workers’ Compensation
Auto/homeowners Insurance
Life Long Term Care
1 Short Term Disability2 Long Term Disability3 Flexible Spending Accounts4 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
Employee Benefit Cost Savings Using CaptivesProgram 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 insuranceOn self-insurance, accelerated deduction of claims cost and tax effective investment accumulation on reserves
Multinational pooling 10% - 15% Commercial insuranceExecutive benefits – 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
Reinsurance (Stop-Loss)
LOSS FUNDSRetained by Captive
Expected Paid Loss
Retained by Business Unit
ExpectedLoss
$ Max Determined
Paid to Reinsurer
Risk Transfer for Aggregate Loss
Protection
Loss Funding -good loss
experience stays with captive,
PR
EM
IU
MS
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-time2. Accrue value in the captive
Operating Costs
How Stop Loss Captives WorkHow Losses Are Paid OutWhere Premium Goes
LossFunding
Expected losses paid by Captive
DeductibleLoss Fund for SI Layer
21
Why are Organizations Interested in Stop-Loss Captives? Existing P&C captives and can be extended to
other employee benefits Could improve tax efficiency of existing captives May be used when multiple employer welfare
arrangement (MEWAs) and other group stop loss structures are prohibited or require more capitalization
Allows heterogeneous entities or smaller organizations to pool coverage
The costs of forming a captive are able to be spread out among all of the participants
The risk per participant is lower 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
Key Considerations When Forming a CaptiveCaptive Type
• Pure• Group• Fronted• Direct• Cell• Rental
Captive Legal Structure
• Stock• Mutual• Reciprocal
Domicile
• Capital and Surplus
• Financial ratios• Minimum
attachment points
Tax Issues
• Deductible premiums
• Insurance accounting
• Deposit accounting
• Accelerated deduction
Regulatory Compliance
• Financial metrics• Record keeping
Human Resources Same carriers and networks Access to transparent data Expert support for health
data/trends, health reform and legal issues
Employees No noticeable change Minor and seamless transition
of services Improved employee support
services
Staff Impact
23
Control• Premium
volatility reduced via claims pooling
and large scale
PROGRAM STRUCTURE• 5-8 custom health plans
• Best in class health management and wellness• 1-2 carriers
• Full data analysis for management/benchmarking
• Active member involvement in decision-making and design
One Central Point of Contact
• Enrollment• Billing
• Employee interface• Employer data
Transparency• Financial and performance data• No hidden costs
Buying Power• Creates cost
savings that increase as the group expands
Flexibility• Select plans
• Select employee contribution
• Maintain existing broker relationships
Choice• Members can
choose to self insure some of
their own risk to save cost
Group Captive Program Development
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Health & Productivity Management
Funding
Group Captive Program Development
Founder
Employer
Group
Additional
Participants
Health Insurance Funding
Improved Risk Mgmt Bulk Purchasing
Other Risks – Life
Disability
Retiree Health
Pensions Life
Performance
Measurement
Healthier, More Productive Employees
Improved Benefits Value and Cost Management
ROI MeasurementContinuous ImprovementTighter Controls and Risk Management
Health Management
Initiatives
Wider Health and WellnessInitiatives
In House Primary
Care
Health and Disability
25
Creation of a Captive
26
The Fundamentals must be 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
How to Establish a Captive Conduct a feasibility study
Loss history Risk/reward discussion (potential benefits) Minimums: solvency, capital requirements, premiums Ownership options Financial analysis Legal: DOL requirements, taxation, and incorporation
Actuarial review Select partners Incorporation Captive licensure Capitalization Reinsurance / insurance contracts Service provider agreements Seek DOL approval if necessary; but it may not be necessary
28
Case Studies
29
Case Study 1: Group Captive Feasibility Study
• 25 employers with approximately 9,000 total employees spend $110M per annum on health insurance
Organizations
• By funding their stop loss health insurance through a captive, the group will conservatively save over $6M
Situation
• 5 year net present value savings exceed $30M• Additional savings are anticipated from:
• Better health management• Reduced reinsurance costs • Further savings on administration
Anticipated Results
30
Case Study 1: Group Financial Projection
Representative Sample
25 employers9,800 employees
Full population60 employers
100,000 employees
Spending $110Mon 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
Case Study 2: Pure Captive
• Global food distributor with 60,000+ employees
Organization
• Offshore property/casualty captive already in place• Opportunity to fund its otherwise unfunded liability• Interested in integrating disability and workers’ compensation• Leveraged current stop loss program to incorporate additional premium volume;
considered direct and fronting placement
Situation
• Reduced reinsurance costs• Further savings on administration• Capture investment income
Anticipated Results
32
Case Study 2: ResultsLine 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
Questions and Contact Information
Karin LandryPartnerSpring Consulting Group, LLCPhone: 617-589-0930Karin.Landry@springgroup.com
Teri WeberPartner and Senior ConsultantSpring Consulting Group, LLCPhone: 617-818-3148Teri.Weber@springgroup.com
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