Funding medical stop loss in a captive is a great way for employers who self-fund their health coverage to add a layer of protection from excessively high individual or aggregate health claims. Medical stop loss captives are not subject to department of labor approval in the United States like many benefit captives are and by funding stop loss in a captive, an employer gains access to lower-cost reinsurance they might otherwise not be eligible for as a direct purchaser.
How is Medical Stop Loss Insurance Funded Using Captives?
The following graphic depicts a typical medical stop loss captive funding approach:
Self-insurance with stop-loss saves money through elimination of carrier profit, premium taxes, improved cash flow as the employer holds on to the claim lag between date of service and date of payment, exemption from state mandates (though not from ACA mandates) and reduced administration fees as these are bifurcated from the claims costs.
As claim costs are not completely predictable, self-insured employers are usually able to budget fairly closely to actual costs through the purchase of a well-designed stop-loss program.
Claims unpredictability generally arises from variance in the number of large claims for any one claimant and the cost per large claim.
The purchase of specific stop-loss insurance coverage protects from claims on any one individual exceeding a threshold amount, say $200,000, in a given year. Larger employers choose specific stop-loss attachment points as high as $350,000 to $750,000 while smaller employers may choose stop-loss levels of $30,000 to $100,000. An actuary can best recommend an appropriate attachment level to assure a small likelihood of claims exceeding a tolerable risk level, such as 110% or 125% of expected.
Stop-loss rates typically increase well in excess of normal medical trend. So if your underlying program costs have gone up say 8% your stop-loss costs are likely to go up well in excess, for example, 13%. The reason for this is the leveraging impact of the stop-loss coverage and attachment point. This results from the fact that claims that were just under the attachment point in 2012 with regular medical trend will be over the attachment point in 2013 and these will be added to all the trended claims already over the attachment point. To counteract this, employers often regularly increase their attachment levels. Captive funding minimizes these changes.
The most common stop-loss terms cover claims on a paid basis. For self-insured first timers, moving from a fully insured program is typically 12/12 – incurred in 12 months and paid in 12 months. This first year is referred to as “immature” as there are fewer expected claims paid due to the claim lag. The second year “mature” terms might be 24/12 to cover the incurred claims run out from the first year. For an increased price, a terminal liability option may be offered, where upon termination, the employer can purchase additional protection to cover the remaining claim run out.
In the past, stop-loss policies typically included a lifetime limit of $1-2 million. As employers can no longer limit their underlying plans it is important to have this lifetime limit removed from your stop-loss policy if you have not already done so. Stop-loss carriers may still look to impose annual limits. It is important that you make sure any annual limits coordinate with your underlying plan.
A crucial coverage for smaller employers is aggregate stop-loss protection. The typical cost is $5.00 per employee per month or less and protects against actual claims on amounts below the specific attachment point exceeding 125% of expected. Though the likelihood of hitting the aggregate attachment point is small, the cost for this sleep-well protection is cheap.
Aggregate stop-loss should not be confused with another offering to lower price – an aggregating specific deductible. By way of example:
Often the reinsurer will reduce premium one for one, or $100,000 in this example.
At time of purchase and annual renewal, most stop-loss carriers ask for disclosure statements requiring the employer to disclose an adverse developing claims bid submission to the carrier. Typically they would like this about 30 to 45 days prior to the effective date. The disclosure statement asks for individual detail for potential large claimants based on past claim history, certain diagnosis, etc. If something adversely material shows up, the stop-loss carrier may want to discuss options such as raising the price, putting in aggregating specific deductible or lasering (excluding certain individuals or using a higher deductible for certain individuals). Carriers willing to provide final rates earlier may build additional margin into their rates.
Typically, employers purchase stop-loss on a single plan basis. Most coverage is purchased in the commercial market. Some employers purchase coverage from their owned captive reinsurer already providing insurance protections to other risks of the employer. This allows the captive to retain pricing risk margins.
As medical stop-loss risk is generally uncorrelated to the remaining captive risk the overall employer risk profile is reduced through this approach. Furthermore, the stop-loss program can be geared towards the needs of the employer including for example various risk sharing arrangements. The captive will typically purchase reinsurance protection to cover catastrophic claims and perhaps share in the claims risk. Generally carriers writing captive reinsurance protection are experts in this area and are not the usual direct stop-loss writers.
Who Should Consider Medical Stop Loss Insurance Captive Funding?
While every circumstance is different and anyone considering captive funding should seek the advice of a professional consultant, generally, $1 million in premiums is the threshold for single-parent stop-loss captive funding. For group captives, a total of 1,000 covered employee lives and $2.5 million in premium is the starting point. There are, of course, a number of variable which may dictate a higher or lower entry point for a particular company or group.
Spring has a long history of developing innovative stop loss captive funding solutions for employers of all size across a number of industries. Contact our team using the form below for more information about captives and all of our medical stop loss funding solutions and you will also receive a copy of our recent white paper, “Funding Medical Stop-Loss in Captives: What You Need to Know.”