Captive Utilization for Employee BenefitsPresented to EHCI

January 17, 2019

1

TODAY’S TOPICS OF DISCUSSION

• Introductions

• What is a Captive Insurance Company?

• Types of Captives

• Use of Captives

• Employee Benefits

• ERISA vs Non-ERISA

• Single Parent

• Pooling

• Stop Loss

• Questions / Answers

2

OUR CLIENTS BENEFIT FROM THE MARKET LEVERAGE, FINANCIAL BACKING AND EXPERTISE OF MARSH.

WHILE, MMA REMAINS NIMBLE TO PROVIDE YOU THE AGILITY, INNOVATION AND SUPPORT

TO HELP GROW AND MANAGE YOUR BENEFIT PROGRAMS.

WORLD CLASS. LOCAL TOUCH.

Captives managed by Marsh write

more than

$44B of premium

20% of the world

captives are

managed by

Marsh

$13 Billion Annual

Revenue

60,000employees nationally

Marsh is part of

MMC along with

Mercer

Guy Carpenter

Oliver Wyman

M A R S H

$1.2 B i l l i onM M A A n n u a l R e v e n u e

64 Boutique Firms

5,000 MMA employees

6th

Largest Benefit

Consultant in US

97% Client Retention

Cutting Edge

Digital

Solutions

25% Year over Year

Growth

M M A

Third-party Premium

Exclusive Reinsurance Agreements

45% - 50% LOSS RATIO

15% - 20% NET RETURN

3 U.S. Captive

Review Finalist Awards

B E N E C A P

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WHAT IS A CAPTIVE INSURANCE COMPANY

A captive insurance company is typically a wholly owned subsidiary that is incorporated and licensed by its domestic insurance regulator for the purpose of insuring the risk of its parent or membership. The captive insurance company is subject to the regulation of its domestic regulator including underwriting authority and minimum capitalization requirements.

Parent

Company

Captive

Insurance

Company

Insured(s)

Company

Subsidiaries

Employees

Vendors

Customers

Reinsurance

(Optional)

Legend

Possibly

Definitely

Premium

Claim payments

Dividends

Premium

Claim payments

Dividends

4

TYPES OF CAPTIVE INSURANCE COMPANIES

Single Parent CaptivesSingle parent captives are owned by a single entity, and exist primarily to underwrite the risks of their parent and affiliated companies. Under controlled circumstances they may be permitted to underwrite risks of unaffiliated parties .

Association Captives Association captives are formed by an association on behalf of its members. Its risks are homogeneous in that they underwrite the same types of risks for companies in similar or related industries and who are participating members of the association.

Rent-a-CaptivesRent-a-captives are sponsor-owned facilities that permit companies to retain their own losses in a formal insurance environment, and rent the necessary licenses and capital from the rent-a-captive’s owner.

Protected/Segregated Cell CaptivesProtected cell captives (or segregated cells) are captives where the assets and liabilities of one participant are segregated from those of the others, and from the owner. Such structures are usually used by rent-a-captives.

Risk Retention Groups (“RRGs”)Risk retention groups are owned by members of similar industries subject to substantially the same business risks. All owners must be insureds, and all insureds must be owners. RRGs operate under a limited federal preemption of the regulatory prerogatives of state insurance commissioners.

5

USE OF A CAPTIVE INSURANCE COMPANY

A captive insurance company can provide a number of risk management benefits. A Captive can provide insurance to parties within their “food Chain: Parent Company, Subsidiaries, Employees, Vendors and Customers.

Provide coverage specific to the needs of the parent company which may not be available in the commercial market.

Capture profit where the commercial market may not recognize favorable loss experience.

Provide direct access to the reinsurance markets.

Provide centralized control over claims resolution.

Reduce Total Cost of Risk (“TCOR”).

Accelerate tax benefits.

6* Life, Disability, Auto & Home have different risk considerations, than typical voluntary benefits.

Life &Disability*

Critical Illness

Hospital indemnity

Accident

LegalInsurance

Id theft

Electronic Product - CellWarranty

Dental &Vision

HomeProduct Warranty

Auto and home insurance*

BENEFITS - ERISA VS NON-ERISA

ADVANTAGES

• FRONTING CARRIER TRANSPARENCY

• THIRD-PARTY PREMIUM - TAX BENEFITS

• UNCORRELATED RISK - HIGH PREDICTABILITY

• FAVORABLE LOSS RATIOS

• PROFITABLE

• ENHANCES EMPLOYEE BENEFITS AT NO COST

• COVERAGES NOT AVAILABLE WITHOUT A CAPTIVE

• EMPLOYERS AND EMPLOYEES BENEFIT BY REINVESTING DOLLARS TRADTIONALLY INSURANCE COMPANY PROFITS

• MIGRATE EMPLOYEES TO HDHP

• ASSIST IN LOWERING MEDICAL STOP-LOSS CLAIMS

7

Employees /

Employer

Employer–owned Captive

Front

1. Employees purchase coverage from front based on personal elections.

2. Front issues policy, handles administration and pays losses.Front cedes premium and losses to Employer-owned Captive. Transaction is done on a Funds withheld basis (Insurer holds funds).

3. Employer-owned captive receives premium from front and pays covered losses to front.

TRANSACTIONAL OVERVIEWSingle Parent Structure - DOL Exemption Required

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DOL EXEMPTION CONSIDERATIONS

Exemptions apply when benefits paid for by the employee.

- However, in most cases the employer is involved in design endorsement pricing of plan

The employer may provide information to employees and make the plan available through payroll deductions.

The employer may not receive compensation that exceeds reasonable reimbursement for collecting and remitting premium payments.

8

TRANSACTIONAL DETAIL Benefits Pooling

Employees /

Employer A

$1M Premium

Employees /

Employer B

$750K Premium

Employees /

Employer C

$1.25M Premium

Employees /

Employer D

$1M Premium

BenPool Re

$2.5M Premium

$1.25M Losses

Employer

Captive B (15%)

$375K Premium

17.65% of Remaining

Employer A

Employer C

Employer D

Employer E

Employer

Captive C (25%)

$625K Premium

33.33% of Remaining

Employer A

Employer B

Employer D

Employer E

Employer

Captive D (20%)

$500K Premium

25% of Remaining

Employer A

Employer B

Employer C

Employer E

Employer

Captive A (20%)

$500K Premium

25% of Remaining

Employer B

Employer C

Employer D

Employer E

$5M Premium

$2.5M Claims

Employees /

Employer E

$1M Premium

Employer

Captive E (20%)

$500K Premium

25% of Remaining

Employer A

Employer B

Employer C

Employer D

For illustration purposes: pool experiences a 50% loss ratio.

Pool participates in a 50% quota share with the fronting carrier.

FrontingCarrier

1. Employees of Employers A-E purchase coverage from front based on employee’s benefit enrollment.

2. Front issues policy, handles administration and pays losses.

Front cedes risk to the Pool. Transaction is done on a Funds withheld basis (Insurer holds funds).

3. The Pool cedes the pooled risk to each participating Employer’s Captive in direct proportion to the individual Employer’s premium volume. Risk ceded to each captive excludes each Employer’s own risk.

4. In the event of a loss, captive is responsible for its proportional share of losses incurred by the Pool, in direct proportion to the individual Employer’s premium volume.

9

PROGRAM CONSIDERATIONS

DESIGN

- Product and selection

- Carrier negotiations

ADMINISTRATIVE AND TECHNOLOGY

- Enrollment and eligibility

- Payroll deduction

- Employer/carrier integration

COMMUNICATIONS

- Market segmentation

- Direct mail, email, video product support, live agents

PROGRAM OPERATIONS

- Underwriting

- Regulatory/state filings

- Claims processing

- Customer service

HUMAN RESOURCES AND PAYROLL

- Benefits integration

- Payroll connectivity

REGULATORY

- Business plan update

- Pro-forma

- Actuarial support

- Domicile approval

- Program Reporting - Compliance

LEGAL SUPPORT AND FIDUCIARY SERVICES

- ERISA compliance

- Single Captive

- DOL exemption required

- Employee fiduciary

- Pooling

- No exemption required

- Risk considerations

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COMPREHENSIVE COMMUNICATIONS STRATEGY Drives R.O.I.

Focus on engaging employees through their preferred mediums including:

• Videos

• Narrated Presentations

• Brochures

• Social Intranet Messages

• Text Messages

• Postcards

• Detailed Enrollment Guides

• Post-enrollment newsletters

• Policy-holder case studies

• Benefit Summary Communications

Mixed media communications:

Video, Print, Custom Landing Pages

Detailed VB enrollment guides

11

RECENT RESULTS

Product % Enrolled Monthly Policy Premium

Accident 29.02% $17.31

Critical Illness 24.24% $22.87

Hospital 14.01% $25.88

Legal 4.72% $21.98

Totals 72.00% $22.01

Employer 2

Product % Enrolled Monthly Policy Premium

Accident 26.00% $19.86

Critical Illness 21.48% $16.70

Identity Theft 23.65% $12.58

Legal 8.37% $19.63

Totals 79.51% $17.19

Employer 1

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BENEFITS ALL STAKEHOLDERS

RISK DEPARTMENT/CAPTIVE HUMAN RESOURCES FINANCE EMPLOYEES

• Diversifies portfolio

• Third party premium

• High predictability

• Low volatility

• No catastrophic loss potential

• End to end solution: admin, legal, distribution, reporting

• Leading edge benefits, only available through a captive

• Enhanced benefit programs, at no cost to the company

• Funding source for employee programs

• True partnership with carrier

• HR is a key business partner

• Benefits not available in the marketplace

• Increased coverage

• Reduced costs

• Improves financial security

• Improved understanding of coverage

• Provides additional profit and cash flow

• Increases participation in the HDHP

• Decreased medical claims cost

• Potential tax benefits

13

CAPTIVE FINANCIAL MODEL

Premium Collected - Voluntary Benefits 453,065 100.0%

Claims - Voluntary Benefits 227,167 50.1%

Program Expenses - Voluntary Benefits 136,826 30.2%

Total - Voluntary Benefits 89,072 19.7%

Premium Collected - Warranty Programs 226,255 100.0%

Claims - Warranty Programs 113,128 50.0%

Program Expenses - Warranty Programs 64,483 28.5%

Total - Warranty Programs 48,645 21.5%

Third-Party Premium - Total 679,321 100.0%

Claims - Total 340,295 50.1%

Expenses - Total 201,308 29.6%

Total - All Programs 137,717 20.3%

5,000 Life Sample Company

Voluntary Benefit Program Summary

Captive Quota Share Projections

14

RightPath Reinsurance SPC, LTD Stop Loss Captive

15

S T R U C T U R E S U P P O R T

Individually

Underwritte

n

Jan 1 renewal date

Underwritten

by TMHCC who

covers 700

Employers through

Captives today$200,000

Floating

Captive

Deductible

Layer

Available to

MMA, Marsh

and Mercer

Clients

Monthly reporting

Managed

by Marsh

Cayman

Annual

Board

Meeting in

Grand

Cayman

Cost Containment

Strategies brought to the Captive

members for consideration during virtual

quarterly meetings

D I F F E R E N T I AT O R S

$1 Millionin surplus returned over last 3 years

Profit

Sharing5%

average renewal

TLO OptionModest 20%

Collateral

Requirement

Captive Aggregate

covered at no

additional cost

Proprietary

Captive

Member owned insurance company/group proprietary captive

R I G H T PAT H S T R U C T U R E

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F L O AT I N G C A P T I V E

L AY E R

1. Each employer chooses their own

specific deductible based on their

own risk tolerance and premium

needs.

2. Captive layer is the same for each

employer above each specific

deductible ($200,000).

3. A set portion of the stop loss

premium is “ceded” to the shared

captive risk layer, “floating” on top of

each emploeyr’s specific deductible.

4. If the premium ceded to the captive

layer exceeds claims/fees, profit is

shared among participating

employers.

$75K$100K

$125K

Excess Risk Layer

Shared Captive Risk Layer ($200,000)

Employer Layer

$275K

$300K

$325K

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J A N U A RY 1 R E N E WA L

D AT E

JANUARY 1,

201812 Month Contract

AUGUST 1, 2018

Short contract, renew January 1, 2019

DECEMBER 1, 2018

Long contract, renew January 1, 2020

FEBRUARY 1, 2018

Short contract, renew January 1, 2019

SEPTEMBER 1, 2018

Long contract, renew January 1, 2020

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$90,000Excess Layer

TMHCC covers remainder of claim using non-ceded stop loss premium

$60,000Employer Layer

Each employer may choose their own Specific Level

$200,000Captive Layer

The most the captive can pay on any one claim

S I N G L E C L A I M E X A M P L E

$350,000

Single Large Shock Claim

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Captive Aggregate provided by HCC Life

Net Ceded Captive Premium

Collateral From Employers

A G G R E G AT E C L A I M

E X A M P L E

Ag

gre

gate

Cap

tive C

laim

s

Captive Risk limited to 120% of Net

Ceded Premium

TMHCC covers captive claims beyond

the 120% with Captive Aggregate Risk

Employer’s collateral covers gap

between end of Net Ceded Premium and

beginning of Captive Aggregate

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Net Ceded Premium X 20% = Required

Collateral

Gross Ceded Premium $675,676

- Carrier Admin Fees + Premium Tax +

Commissions,+ Federal Excise Tax+ Captive

Management Fee- $175,676

= Captive Claims Fund (Net Ceded

Premium)= $500,000

Net Ceded Premium $500,000

X 20%

COLLATERAL REQUIRED $10,000

D E T E R M I N I N G

C O L L AT E R A L

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How RightPath

Saved An

Employer

$332K

The Challenge The Solution The ResultThe client was looking at

the self-funded market

standard in order to have

more flexibility in the plan

design and better

manage their overall risk.

They chose a

comfortable $25,000

specific deductible level

with a total premium of

about $886k .

The Client:

Health Care Services

Company | 278 Employees

Taking advantage of their

favorable claims experience,

they selected the RightPath

Captive with Tokio Marine

HCC (TMHCC).

The Client purchased

$25,000 for one share of

RightPath Stock.

After the initial stock purchase,

reduction for captive expenses

and the accounting for the captive

as a whole was completed, the

Client received a net surplus of

more than $332K.

Since joining RightPath this client

has saved more than $425k and

has an average stop loss renewal

of 3% vs. just accepting the

leveraged trend renewals each

year.

RightPath Traditional Stop Loss

Total Premium $885,669 $841,386

Premium Ceded (Paid) to the Captive $753,039 N/A

Less Captive Expenses -$234,411 N/A

Net Ceded (Paid) Premium $518,628 N/A

Total Claims -$134,590 $0

Shared Risk Transfer -$26,465 N/A

One Time Stock Ownership Purchase -$25,000 $0

Net Surplus Returned to Employer $332,573 $0

C A S E S T U D Y

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C A L C U L AT I O N F O R R I G H T PAT H

R E N E WA L S

INDIVIDUALLY UNDERWRITTEN

The Premium is based on each member company’s

experience

Allows the Captive to determine how to best

handle and manage the risk (including use of

lasers)

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Captive

Member 1

Captive

Member 2

Captive

Member 3

Captive

Member 4

Captive

Member 5Totals

A Claims Loss Fund $227,500 $292,500 $357,500 $422,500 $487,500 $1,787,500

B Loss Fund Claims $323,000 $142,500 $393,250 $300,000 $100,000 $1,258,170

C Member Surplus/Deficit (A-B) -$95,500 $150,000 -$35,750 $122,500 $387,500

D Experience Assessment (Collateral Call) $45,500 $0 $35,750 $0 $0 $81,250

E Captive Member Excess Loss Sharing $50,000 -$9,500 -$11,500 -$13,500 -$15,500

F Percent of Premium 19% 23% 27% 31%

G Collateral to secure experience assessment and captive aggregate layer $45,500 $58,500 $71,500 $84,500 $97,500

KCaptive Net Surplus(Captive Member Dividends)

(C+D+E)$0 $140,500 $0 $109,000 $372,000 $621,500

In this scenario Captive Members 2, 4 & 5 had a surplus but Captive Members 1 & 3still benefited because their bad claims experience was spread over the rest of the captive.

C A P T I V E F I N A N C I A L

M O D E L

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MEDPOOL Re

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Changing The Purchase of Medical Stop Loss

Employer

Stop Loss Insurer

Traditional Stop LossMedPool ReStop Loss

PremiumPremium

Premium

Losses

Premium

Employer

Gerber / RMTS

Employer’s Captive Retains

Share of Pooled Risk

Losses

Losses

Med Pool Re

Pooled Layer

Losses

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* $250k retention is for illustration; Employers’ retention will generally range from US$150,000 to US$500,000 per covered person.

**Assume 60% of total stop-loss premium is for $250k excess $250k layer

Employer A Employer B Employer C Employer D

MedPool Re

Captive B Captive C Captive D

$600,000

Insurer Cedes Premium / Risk

for pooled layer = $2,840,000**

Employers A-D

Broker

Gerber

$4,800,000

$700,000 $840,000$700,000

Funds held by Gerber

Captive A assumes

24.5% of MedPool

losses

Captive B assumes

21% of MedPool

losses

Captive C assumes

30% of MedPool

losses

Captive D assumes

24.5% of MedPool

losses

$1,200,000 $1,000,000 $1,400,000 $1,200,000

Captive A

1. Employers A-D purchase Stop

Loss Policy from Gerber with a

$250k* per claim retention.

2. Gerber issues policy to Employer

to cover all losses excess of $250k*

retention.

Gerber buys reinsurance from

MedPool Re for losses in layer

between $250k - $500k. Transaction

is done on a Funds withheld basis

(Insurer holds funds).

3. MedPool Re cedes a % share of

the premium for pooled risk in $250k

- $500k layer to each participating

Employer’s Captive. The premium

amount ceded will be in proportion to

the individual Employer’s premium.

4. Captive responsible for its % share

of total losses in MedPool Re for

$250k - $500k layer – the % share is

determined by dividing individual

Employer premium for pooled layer

by total MedPool Re premium.

…

…

Transactional Overview – MedPool Re

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QUESTIONS / NEXT STEPS

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requirements.

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