When it comes to Actuarial Services, many people are unclear what it entails. The video below breaks down how actuaries can help cut costs and optimize benefits plans.

Spring Consulting Group provides a wide range of Captive Services when it comes to the Employee Benefits and Property & Casualty (P&C) industries. In this Whitepaper, you can learn more about our captive services and how we approach captive implementation/optimization.

the International Foundation of Employee Benefit Plans recently wrapped-up their 32nd Annual Health Benefits + Conference Expo (HBCE) in Clearwater Beach, Florida. The conference brought together healthcare and benefits professionals from a range of industries to discuss leading topics and share expectations for the future. Having heard such positive feedback about the event, Spring was glad to attend, exhibit, and speak at the conference. Below are some of our biggest takeaways.

Spring Booth HBCE

1) Pharmacy Cost Containment

This year there was a lot of talk surrounding the price of prescription drugs and tactics employers can adopt to help control costs without cutting benefits. There are many factors influencing the high costs of pharmacy drugs, some of which include chronic disease prevalence, the aging population and the growing volume of specialty medications. Below are some of the top sessions focused on controlling Rx costs.

– Representatives from Express Scripts explained the upsides to working with a Pharmacy Benefit Manger (PBM) and how they can help address pharmacy policies in their session titled, “How to Work With Your Pharmacy Benefit Manager.”

– The CEO and Co-Founder of TruDataRx, Cataline Gorla, discussed how comparative effectiveness research (CER) is being used by other countries to decide which drugs work best for specific medical conditions, and how self-insured employers can save money with said data.

2) Addressing Chronic Conditions

According to the Center for Disease Control (CDC), 90% of the nation’s healthcare spending goes towards people with chronic and mental health conditions1. As chronic diseases are very common among the American workforce, employers have started implementing specific benefits and policies to address common conditions, such as diabetes and obesity. Some of the sessions around this topic that we found most interesting include:

– Speakers representing the Nashville Public School System explained how they were able to introduce free resources such as telenutrition and fitness center access to help combat obesity and other health disparities.

– Dr. Mudita Upadhyaya from St. Jude Children’s Research Hospital presented on prevention strategies to address mental health and obesity in a pre- and post-COVID world; and why a mixed approach may be best.

– The Diabetes Leadership Council’s CEO, George J. Huntley spoke on diabetes and chronic disease risk management strategies, including medicines and technology that can help patients manage and prevent the disease.

3) The Future of Healthcare & Benefits

In recent years we have seen a great shift in the healthcare and benefits industry; we saw a great increase in telehealth, mental health resources, new/alternative types of paid leave, including sick leave and more. As we transition to a post-COVID world, we expect the evolution to continue. Below are some of the top trends professionals believe we will face in the coming years.

– Our Senior Vice President, Teri Weber, presented on market forces employers can utilize to meet future absence management challenges. Her session listed techniques employers can adopt to improve day-to-day administration of disability, absence and accommodations.

– In a session titled “Innovative Health Care Models—The Future of Direct Primary Care,” the presenter explained how many employers are changing to value-driving healthcare models to boost access and reduce costs.

– A session titled “Breaking the PTO Mold, Without Breaking the Bank,” reviewed how typical Paid Time Off (PTO) programs can be altered to better support employees’ well-being and financial health.

– The final session of the conference spotlighted how the pandemic has led to an increase in personal, economic and other stressors and has had a drastic impact on mental health, substance misuse and addiction. Attendees were informed on how they can implement workplace solutions that address these issues as well as identify warning signs.

The warmer weather was certainly a bonus, but the insights we gleaned and connections we made were what will keep us coming back to the HBCE conference. We want to thank IFEBP and our fellow colleagues who took the time to share their experience, stop by our booth, and make the energy so positive.

1https://www.cdc.gov/chronicdisease/about/costs/index.htm

Our Senior Vice President, Prabal Lakhanpal wrote an article for the Boston Business Journal on how employers can continue to provide strong benefit packages during a time of high inflation. You can find the full article here.

As seen on Alera Group’s Insights Page

In the cyclical market for Property and Casualty Insurance, we are more than a year into hard-market conditions, leading growing numbers of businesses to consider alternative risk funding. That, in turn, has created an abundance of work for insurance actuaries and Captive Insurance consultants.

OK, that’s a lot of insurance speak for one paragraph. Let’s unpack:

— A hard market for insurance is characterized by a rise in rates, a reduction in options for coverage, heightened scrutiny by policy underwriters and reduced carrier capacity for coverage limits. A combination of catastrophic weather events and so-called “nuclear verdicts” in liability lawsuits — as well as the cyclical nature of the Property and Casualty (P&C) Insurance market — were the driving forces behind the hardened conditions before the onset of COVID-19, and the pandemic exacerbated matters. Rate increases have leveled off to some extent in 2022, but, in general, most conditions in the market remain unfavorable to consumers.

— Alternative risk funding — also known as alternative risk financing or alternative risk transfer — is a mechanism for providing coverage by means other than commercial insurance. Types of alternative risk funding include Captive Insurance programs, in which a business or group of like businesses creates and funds its own private insurance company to cover one or more risks in the realms of both P&C and employee benefits. Workers’ Compensation, General Liability, Auto, Professional Liability and Medical Stop-Loss are the more common coverages to start with when insuring through a captive, but captives often expand into a funding mechanism for many of an organization’s other lines of insurance, including Cyber and Umbrella (also known as Excess Liability Insurance).

— Insurance actuaries use math, statistics and financial models to analyze the cost of risk and determine how much money a company should pay to protect itself against risk. All insurance carriers employ actuaries to help set policy premiums and limits. Some insurance agencies work with actuaries to negotiate policy details with carriers or, in a captive arrangement, to determine a premium that will cover claims and, in the long term, reduce the insured’s total cost of risk. Captives have the advantage of also building up retained earnings over time and allowing companies to take on more risk, generating additional insurance cost savings for the parent. Among multiple P&C capabilities, actuaries who work with or for an agency also educate clients on the cost of risk and how to manage it.

Now that we’ve cleared that up, let’s talk about the role of an actuary in managing the cost of risk and protecting your business with a customized insurance program — whether you’ve chosen to pursue alternative risk funding or not.

Why an Alternative Solution? And Why Now?

Business leaders know all too well about the hard market for Property and Casualty Insurance. Just as the pandemic began to wane early in 2022 and there were some signs of casualty rate increases leveling off, Russia’s invasion of Ukraine escalated supply-chain disruption and fuel shortages, accelerating the rise in economic inflation. Damage resulting from Hurricane Ian only made matters worse, of course, driving reinsurance — insurance for insurers — into what the Bank of America termed a “true hard market” of its own, with rising costs getting passed on to consumers. These issues have led to overall increases in U.S. P&C industry combined ratios over the past few quarters, sparking further rate increases for certain lines.

It’s no wonder more organizations are looking at captives and other alternative risk-funding solutions.

“Overall, between 2017 and 2021, captives added $4.3 billion to their year-end surplus while returning $5.8 billion in stockholder and policyholder dividends, representing $10.1 billion in insurance cost savings over purchasing coverage from commercial market third parties.”

“The number of U.S. captives continues to rise, although the growth of captive formations was tempered by the onset of economic uncertainty resulting from the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements.”

“However, these adverse conditions can serve to highlight the benefits of the captive segment and provide businesses an incentive to establish them,” said Fred Eslami, associate director, AM Best.

“‘This current environment allows captives to customize coverage for risks that may be uncommon or difficult to write or place in the standard market,’” Eslami said.

The growth in Captive Insurance has led to an increasing willingness on the part of carriers to work with captives and regard them as partners rather than threats, increasing options for captive solutions. And even if an organization in the end chooses to forgo alternative risk funding – either for an entire P&C program or for individual coverages, such as cyber or commercial umbrella – simply exploring an alternative and having it as an option can improve its position in the insurance market.

Actuary Capabilities: Your Data, Your Future 

For insurance agents and brokers, designing an insurance program tailored to your industry and company is as much art as it is science. Working with an actuary enables you to incorporate greater amounts of empirical evidence into evaluating risks and determining insurance solutions: Here’s what the numbers demonstrate about your situation now, and here’s what our analysis shows about how you’ll perform using this solution.

While any good broker will work to design an insurance program customized for your business, a broker working with an actuary will be especially well-equipped to design a solution tailored to your unique needs and goals. Among the key issues an actuary can help brokers work through are:

  1. Determining appropriate retention/deductible levels to help the client reduce the total cost of risk;
  2. Estimating client retained unpaid claims liabilities at quarter/year-end;
  3. Estimating carrier letter-of-credit need for a large deductible program; 
  4. Estimating possible retained loss outcomes at various confidence levels;
  5. Performing a captive feasibility study.

Many brokers work in silos, taking a vertical approach in evaluating risk based on industry. Actuaries generally don’t distinguish by industry; they analyze across various industries, focusing on each individual client’s loss history (including frequency and severity), claim status, policy details, exposures and risk-control program before determining financial projections for the organization. Taking the long-term view allows for consideration of fluctuations in company and market performance over a period of time, and increases the likelihood of long-term savings and profits.

Optimizing Your Insurance and Benefits Solutions

As companies grow, they generally reach a point where their claims experience is predictable across one or more lines of coverage. Able to determine such predictability, an actuary can then help you:  

If you’ve reached the point where your business is paying, say, $100,000 to $250,000 in annual premium, a group captive might be the best solution because you probably aren’t yet structured appropriately to meet the insurance tests required to form a single-parent captive and the economies of scale may not be there for a single-parent captive solution. In such a case you may need to diversify your risk with other organizations (heterogeneous or homogeneous) — in a group captive or in a shared-risk pool solution utilizing reinsurance — for at least the time being.

The bigger, more complex, more diversified a company becomes, the more a fully funded, single-parent captive emerges as an optimal solution in which the business is insuring only its own risk. A single-parent captive also allows for more coverage flexibility and transparency than a group captive program. Quite often, both benefits and P&C risks are insured by a single-parent captive.

What drives the decision to move from traditional, carrier-based insurance to a captive program is savings and, ultimately, return on investment (ROI). How? By moving expenditures that create carrier profits into the captive solution. Captives are highly efficient, with very low expense ratios, unlike carriers. Free from providing a carrier with underwriting income and investment income on held reserves, you’re able to retain this income to ultimately generate a profit and facilitate an insurance mechanism that competes with the commercial market.

An Organization-Focused Approach

In taking an organization-focused approach toward financial analysis, actuaries look not only at funding for Property and Casualty Insurance but also at spending on employee benefits. Most captive insureds will see annual savings between 10% and 40% for premiums that flow through a captive instead of the commercial market.

As we approach the end of the year, Alera Group invites you to the final event in our 2022 Engage series of employee benefits webinars, A Look Ahead to 2023: Hot Topics and Trends. Join us on Thursday, December 15 as we discuss benefits financial officers and HR professionals need to think about now — including alternative solutions — as they plan for the year ahead.

ACCESS ALERA’S WEBINAR HERE 

Our Actuarial Team teamed up with Alera Group experts on this COVID-19 and Mental Health Trends whitepaper which looks at the post-pandemic mental health landscape, including impacts on employees, children, plan costs, care gaps, and substance abuse.

In collaboration with Alera Group, our Actuarial Team helped create a whitepaper which provides guidance around eligibility, procedures, and plan costs for coverage of over-the counter COVID-19 tests within health plans, as mandated by President Biden. You can find the full whitepaper here.

Captive International has released the winners for the 2022 US Awards. Spring is proud to announce that our company and our Managing Partner, Karin Landry were selected as winners for Best Feasibility Study Firm and Best Feasibility Study Individual (respectively). We were also highly commended for Best Actuarial Firm, Best Individual Feasibility Study (Prabal Lakhanpal) and Best Actuary (Peter Johnson).

A (Brief) VCIA Session Recap

I had the pleasure of speaking at Vermont Captive Insurance Association (VCIA) Annual Conference last week, joined by two colleagues with impressive backgrounds. Jeff Caudill, Director of Risk Management at Haskell and a client of Spring’s, and Mary Ellen Moriarty, Vice President, Property & Casualty at College Insurance Company (EIIA) joined me to discuss different ways that captives can be used to tackle the hard market hurdles we’re currently facing in the insurance industry.

With myself as the moderator and consulting actuary, Jeff representing a brand new single parent captive, and Mary Ellen representing a veteran captive, it was a well-rounded panel that pulled in multiple perspectives.

The Clouds Behind the Hard Market

 

This visual does a great job at illustrating the many challenging atmospheric effects in the insurance air right now, particularly on the property & casualty (P&C) side of the fence (no pun intended). With Mary Ellen representing the higher education space, we felt it important to highlight unique risks that colleges and universities are grappling with, in addition to the other complicating factors (or clouds) we see here.

In my work I’ve seen that this climate has resulted in increased carrier profitability for certain lines over the last couple of years, such as auto liability, but decreased carrier profitability in others (such as cyber and commercial property).

In higher education, Mary Ellen explained there have been hard market consequences due to underwriter inability to achieve profitability, and as noted in the visual, they are dealing with risks many organizations don’t need to think about, like traumatic brain injuries, the general public accessing the property, and a different kind of medical malpractice. As a result, there are a limited number of carriers willing to provide coverage in this space. As a nod to captive advantages, EIIA was able to grow surplus from their captive prior to the hard market, from 2002 to 2022, which has been extremely helpful in this “stormy environment.”

This success story led us to a discussion around the business case for captives, a snapshot of which you can see here in this video.

Jeff then gave a bit of a play-by-play regarding the process, implementation, timelines and driving forces behind Haskell’s decision to switch from a group captive to a single parent captive (a synopsis of which you can find in this case study).

Looking Ahead

Both Jeff and Mary Ellen described some next steps for their captives, which may include writing in:

Food For Thought

Like most good things in life, you kind of had to be there to get the full experience and maximize your take-aways. So I don’t want to give it all away, but I will leave you with some food for thought that came out of the Q&A for the session. If you want to know the answers, please get in touch!

And last but perhaps most importantly:

As you can see, we can have some fun in the captive world, and much of it was had at VCIA! Before you leave, check out our captive business case video here, inspired by this presentation.