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Debbie Liebeskind, FSA, MAAA, CLU, ChFC
Towers Watson
1
Captives and Medical Benefits
Medical Stop Loss in the U.S.
2
Discussion Outline
General background on stop loss insurance
Medical reinsurance transaction
General Background on Stop Loss Insurance
3 3
4
Introduction
Over a $5 billion stop loss market in the U.S.
Provides protection to self-insured employers who want to mitigate
claim risk due to large or unanticipated claims fluctuation
Generally two types of stop loss insurance available:
Specific stop loss
– Protection against large individual claims during a year
– Most common
Aggregate stop loss
– Protection against the sum of all claims in a year
– Not as common with medium-sized to larger employers
5
Why purchase stop loss?
Large claims are unpredictable
Health Care Reform eliminates coverage limits, which may change the risk management tolerance of some employers
The cost trend for large claims continues to rise faster than overall medical trend. Stop loss rate increases average at least 15%-20%
Intensity of services being delivered
Increasing use of high cost drugs
Ability to prolong life and save premature infants earlier
New and expensive technologies
Leveraging impact of high stop loss deductibles
29.6
35.7
39.0
42.0
8.810.8
13.0 13.0
3.44.4 5.0 5.0
1.2 1.5 2.0 2.0
0
5
10
15
20
25
30
35
40
45
2008 2009 2010 2011
$300,000
$500,000
$700,000
$1,000,000
Number of claims per 100,000 participants Source: Thompson Reuters - MarketScan
6
Factors to consider when buying stop loss coverage
Risk
management
philosophy
There is no “one answer” or algorithm to determine whether to buy stop
loss and how much. Risk management philosophy and cash flow are the
primary determinants of whether to purchase stop loss and how much
protection. Companies with conservative philosophies purchase more
insurance and those companies willing to accept more risk purchase less
insurance or don’t purchase insurance at all. Towers Watson can help
you think through the elements you should consider.
Spread of Risk
Generally, smaller employers have a greater need for protection due to a
higher risk of claim fluctuation. Larger employers have a lesser need
since the size of the group enables a greater spread of risk. Very large
employers often absorb all the risk and eliminate stop loss insurance
completely. Much of the decision goes back to risk tolerance. Towers
Watson can help organizations understand the risk volatility at various
size levels.
7
U.S. Medical Stop Loss Deductible Benchmarking – 2013 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers
Watson Stop Loss Purchasing Program)
8
U.S. Medical Stop Loss Deductible Benchmarking – 2014 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers
Watson Stop Loss Purchasing Program)
9
What are the different contract bases and what is the
most appropriate contract basis for my program?
Basis Description
Incurred Period
Covered
Example1
Paid Period
Covered
Example1
Claims Not
Covered
Example1
Paid
Covers all claims in a year, regardless of
when the claim is incurred. Generally
available on renewal but not year 1 of a
contract.
Any date 12 months
1/1/14 to 12/31/14
None; all claims
covered.2
24/12
Covers all claims paid in a year that are
incurred during the 24-month period
beginning 12 months before the year
begins.
24 months
1/1/13 to 12/31/14
12 months
1/1/14 to 12/31/14
Incurred prior to
1/1/13.2
18/12
Covers all claims paid in a year that are
incurred during the 18-month period
beginning 6 months before the year begins.
18 months
7/1/13 to 12/31/14
12 months
1/1/14 to 12/31/14
Incurred prior to
7/1/13.2
15/12
Covers all claims paid in a year that are
incurred during the 15-month period
beginning 3 months before the year begins.
15 months
10/1/13 to 12/31/14
12 months
1/1/14 to 12/31/14
Incurred prior to
10/1/13.2
Following are the most common bases listed in order from more comprehensive coverage to less comprehensive coverage.
1Example assumes a 2014 contract year. 2Technically, claims paid after 12/31/2014 are not covered unless the contract renews, which is generally the case.
10
Why not just go to my medical carrier for stop loss insurance?
Advantages Disadvantages
Medical
Carrier
Ease of administration for claims
and premium billing.
No stop loss coordination
charges, which occur with an
outside Direct Writer (roughly
$0.50 PEPM).
Not always the lowest cost.
Generally, medical carriers
cannot include coverage for
carve-out PBMs.
Need for multiple contracts if
there are multiple medical
carriers.
Direct
Writer
Lower premium rates.
Coverage for Rx drugs if there is
a carve-out vendor.
Another vendor to manage.
If you want to go with a direct writer, Towers Watson’s Stop Loss Purchasing Program may be of value to you
Medical Reinsurance Transaction
11
12
Reinsurance basics
The medical reinsurance marketplace is even larger than the stop
loss marketplace
Thus, it is generally more competitive than the Stop Loss marketplace
– For one recent client, reinsurance would save 51% over medical vendor stop loss
Towers Watson’s Stop Loss Purchasing Program would save 34% over
medical vendor stop loss
It also tends to use slightly lower medical trend upon pricing renewals
– We are typically seeing 8-10% trend on reinsurance vs. 15-20% on stop loss
But reinsurance can only be purchased by an insurance company
Aha, a captive is an insurance company and can purchase
reinsurance
13
Cons
Pros
Most economic value add solution
Even lower future cost due to lower
reinsurance trend vs. stop loss trend
There may be an opportunity for P&C
tax benefits by having SL as 3rd party
risk in the captive
Would be in a position to “easily” move
to a model where the captive takes a
slice of the risk
Provides potentially uncorrelated risk to the
captive
May be possible to use group risk
bearing capacity when one or more
subsidiaries purchase commercial stop
loss to transfer their risk
Too great for the subsidiaries to bear but
well within the risk bearing capacity at the
group level
Additional captive accounting needed
Additional agreements needed
Need to be certain that no employee
contributions are used for stop loss
To preclude need for DOL prohibited
transaction exemption approval
The captive would have to file and issue a
stop loss policy to the plan sponsor
Solvency requirements may increase and
would need to be evaluated if the captive
takes a slice of the risk
There may be a small premium tax,
depending upon state where captive is
domiciled
Direct placement insurance premium tax
might be applicable, depending upon the
laws of the states where employees are
located
Pros and cons of captive reinsurance over stop loss
14
Sample premium flow chart for U.S. medical stop loss
Captive Reinsurer
Self-Funded Medical Vendor
Annual Premium January year 1
Annual Premium Charge Back January year 1
Plan Sponsor
C A B
Plan Sponsor Subsidiaries/Divisions
within 30 days after reports received
14
15
Action Steps
Collect claim data and do feasibility analysis to determine whether or not to proceed
with captive reinsurance
Finalize plans and financial arrangements with self-funded medical vendors
If captive reinsurance is desired, kick off reinsurance procurement process by
September of 2015
Review plans and objectives
Create the RFP
Market the program and obtain quotes
Review results of marketing (quotes, contract terms, limitations)
Negotiate final terms and place contract