By JEFF FITZGERALD, an associate director of Strategic Risk Solutions in Charleston, S.C., who specializes in consulting on the use of captives for health insurance and employee benefits
insurance captives, both homogeneous and heterogeneous, have become an accepted risk financing mechanism for property/casualty risk. They have been particularly effective in the middle market where insurers are not large enough to retain risk on their own. They require a pooling of risk with other insureds to achieve critical mass and stability. Different structures have evolved from a single pool to a layered approach in which most of the risk sharing occurs in the second layer. These group captive programs combine the advantages of retaining risk with the group purchasing power for reinsurance or excess insurance.
In the property/casualty industry, these vehicles have thrived during hard markets and many are now large, mature programs. Healthcare insurance on the other hand has not seen any growth in the alternative market until very recently.
The cost of health insurance for individuals and employers continues to rise with no end in sight. This seems especially true for midsize employers of between 50 and 10,000 employees, who are most affected by these health insurance increases and least likely to be aware of their alternatives.
Over the past several years, group captives have emerged as a viable structure in health
benefits insurance. Could they provide the same benefits in health insurance as in property/casualty?
Group programs for health insurance are not new. There are existing group structures which are used by midsize employers to achieve economies of scale regarding pricing. These programs do not use a captive but are examples of groups coming together for health insurance. Group purchasing via these structures can be a precursor to retaining risk through a captive.
A Multiple Employer Welfare Arrangement (MEWA) is a health insurance program where a group of employers forms a coalition to offer a health plan to their employees. They can be self-insured or fully insured and are subject to the regulations of each state they are in. As many group captive programs cover more than one employer group, they can be mistaken for MEWAs. The most striking differences are that a MEWA will offer a single group insurance rate, the MEWA will offer a single insurance plan and that they are often domiciled in a particular state which has jurisdiction over the coalition.
An Association Health Insurance Plan (AHIP) is an association of similar businesses purchasing a shared health insurance plan. The intent of these programs is to get group purchasing power by having several employers purchase insurance together.
Both MEWAs and AHIPs are existing group purchasing health insurance programs. Like all initiatives, some have been very successful and some have been underfunded and under regulated. While they may be options for an interested group, limitations associated with these programs have led to interest in the use of group captives.
Group captive programs have been developed to provide midsize employers with options regarding their health insurance procurement. They share a structural similarity in that a group captive participates in the stop-loss layer of a self-funded program. To make a comparison to property/casualty group captives, the employer self funds a deductible, the captive reinsures a pooled working layer and is reinsured for large claims on a specific and aggregate basis.
FOUR GROUP CAPTIVE PROGRAMS
Beyond the participation of the captive in the stop-loss layer, the structure and demographics of the different programs vary. At least four group captive programs that are being used today.
These are programs where a self-insured health insurance plan or trust resides in one state. The members of this health insurance plan are all individually underwritten and issued policies from the plan. A captive--either fronted or not--functions as a stop-loss reinsurer to an individual employer group. Key characteristics of this program are that it operates in a single state, it uses a shared administrator, network and plan design, and there is a pooling of the working layer through the use of a captive.
The captive follows the individual state's stop-loss regulations regarding specific and aggregate coverage. The individual employer group will often fund their self-funded portion up to the aggregate attachment point of the stop loss thereby creating funding similar to a fully insured arrangement. There are implementation and funding requirements with these programs.
These programs are often, but not always, created for combined small employer groups (less than 50 employees). They are interested in a captive arrangement but do not want to risk the funding gap between their expected and attached claims. These same groups are often those who have trouble purchasing affordable health insurance due to their particular industry and its correlating population. Because of this, some of the members may be involved in an existing property/casualty captive. The benefit of the captive is that the program provides the group with stable and cost effective health insurance.
In these programs, each employer group assumes a defined layer of partial self-insurance with a stop loss carrier reinsuring them for specific and aggregate claims. A group captive is set up to reinsure the stop loss carrier for a portion of the specific and aggregate claims they assume. Key characteristics of these programs are that they operate across more than one state, there are separate deductible programs for employer groups, the deductible layers are often small as they are interested in retaining premium within their captive facility; there is a shared administrator and network, and plan designs can be individualized or standardized
Participants in this type of plan are usually fully insured, and these programs are most suited to midsize employers with between 50 and 250 employee lives. These groups are often not large enough to completely self-fund on their own or to culturally to make the transition to paying their own claims.
The benefits allow midsize employers to transition to self-funding and use the captive to aggregate premium while benefitting from expected program underwriting profit. Furthermore, smaller groups who are interested in enacting wellness programs are able to determine over time the economic benefits of doing so by removing themselves from a fully insured manual underwriting market.
These programs are designed for employers who have been self-funded for several years and have a comfort level with their claims administrator, disease management platform and present network. Key characteristics of the program are that they operate in multiple states, they contain a separate working layer or deductible program for employer groups, the deductible layers are likely to be much larger than under a MHIP, with the bulk of the premium in the working layer; they are served by an individual administrator, network and plan design, and they include heterogeneous groups.
These programs are geared toward larger midsized employers (250 lives plus) who are self-funding their health insurance. Since they are self-funded already with higher deductibles, the only premium that remains is what they pay to a stop-loss carrier. Because of the present stop loss market, these groups would like to see their insurance not as a price-based commodity but as a long-term investment.
The benefit is that this captive allows these groups to recapture as much of their premium dollar as possible while still protecting themselves from very large claims should they desire. The group captive decreases the severity of yearly claims by jointly self-insuring behind an admitted carrier.
RRGs insure the contractual liability of self-funded health insurance plans. It is an innovative way for a group of self-funded health plans to pool their stop loss needs instead of using a traditional stop-loss carrier. While several states have approved the formation and business plan of these RRGs, other states have not accepted the use of an RRG for this type of coverage. Depending upon the individual states--as a captive and health insurance regulatory concern--these programs can either be very successful or not receive regulatory approval.
Legal concerns are compounded as each individual state likely will look to regulate the RRG programs, in addition to regulation from the RRG's domiciliary state. Benefits of an RRG program are that they allow for a multistate platform, underwriting flexibility, membership consent and the removal of fronting fees paid to an issuing carrier.
When determining which program to pursue, there are individual as well as group decisions. The first is the size and health benefits sophistication of the individual employer group. The second is whether they are part of a larger group of likeminded health insurance purchasers. Depending upon the expectations of an employer, there are decisions to make regarding forming a new program or participating in an existing one.
If the employer is serious about being part of a group that allows them to participate in their own health insurance, they should interview the unbundled participants (broker, captive manager, administrator, enrollment group) as the service providers competency and ability to work together determine the success of the individual or group of policyholders.
Health insurance will remain a necessity for employers and their employees. There are innovative ways that insurance carriers, brokers and captive managers are allowing policyholders to participate in their own health insurance plan. Every month new groups are creating platforms and policyholders are abandoning the status quo. There are ample opportunities to determine the best options available for both the individual insured and interested groups.
August 1, 2009
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