Using Group Captives for Health Insurance
Fitzgerald, Jeff, Risk Management
While the P/C market continues to create innovative single parent and group captive programs, the use of captives to insure accident and health risks has been limited. There have been less than 20 single parent health insurance programs established in the past 10 years. The cost of health insurance rises every year while the P/C market remains soft. Mid-size employers (more than 50 employees but less than 1,000) are most affected by health insurance increases and often unaware of alternatives. There is increasing interest from midsize employers to proactively address their health insurance costs. Could a captive be the answer?
Many believe that captives do not apply to health insurance and should not be considered as a potential solution. These perceptions are usually due to a lack of information and understanding about captives and the role they play.
Perception: Employee benefits purchasers feel that they have no control over the health care events of their employee population. Purchasers often see themselves as victims rather than informed consumers.
Reality: Risk management techniques can be applied to health care costs as well as P/C costs. Preventative care and claims management can reduce the costs of claims. Risk financing techniques such as captives can provide more efficient financing mechanisms.
Lack of Size
Perception: Due to size, cost and regulatory constraints, mid-size employer groups cannot efficiently participate in a health insurance captive program.
Reality: While mid-size employers will probably be too small for a single parent captive, there is the possibility of a group captive health insurance program. The most common structure mid-size employer groups utilize is a group captive supporting a partially self-funded health insurance plan. Similar to the rise of group captives in the P/C market, individuals have found that sharing risk within a defined layer of exposure is an option when reviewing premium, access to the reinsurance market and homogeneity.
Unpredictability and Increased Risk
Perception: By sharing risk with others and participating in a larger pool, employers believe they are increasing their health insurance risk.
Reality: The smaller the group, the less predictable the medical claims. Fully insured mid-size employers are part of a larger underwriting pool overseen by their insurance carrier. The use of a group captive creates a structure where individual groups can share claims together in a manner that grants them transparency and greater predictability.
Increasing the size of a group does increase the total amount of risk. At the same time, the volatility and unpredictability of medical claims decreases.
Mid-size employers are better able to predict their claims and plan for them by participating in a larger group of like-minded employers.
ERISA and HIPAA
Perception: Single parent captive programs have had to undergo Department of Labor exemptions for the ERISA benefits in which they participate. Midsize employers and their advisers believe they need to obtain the exemption.
Reality: This exemption is not necessary for a properly structured association, group and agency captive program. ERISA and HIPAA compliance is important, but employer groups can remain compliant in a self-insured solution that utilizes a captive.
Lack of Agent Understanding
Perception: The vast majority of captive professionals have an exclusive background in P/C lines of coverage. Many health insurance brokers are aware of captives but have no background in them. Most agencies that have producers on both sides are not aware that there are overlapping opportunities.
This is not a criticism of insurance agencies, but rather a recognition of the newness of these programs and the separation between P/C and accident and health producers. …