Debbie Liebeskind, FSA, MAAA, CLU, ChFC

Towers Watson

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Captives and Medical Benefits

Medical Stop Loss in the U.S.

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Discussion Outline

General background on stop loss insurance

Medical reinsurance transaction

General Background on Stop Loss Insurance

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Introduction

Over a $5 billion stop loss market in the U.S.

Provides protection to self-insured employers who want to mitigate

claim risk due to large or unanticipated claims fluctuation

Generally two types of stop loss insurance available:

Specific stop loss

– Protection against large individual claims during a year

– Most common

Aggregate stop loss

– Protection against the sum of all claims in a year

– Not as common with medium-sized to larger employers

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Why purchase stop loss?

Large claims are unpredictable

Health Care Reform eliminates coverage limits, which may change the risk management tolerance of some employers

The cost trend for large claims continues to rise faster than overall medical trend. Stop loss rate increases average at least 15%-20%

Intensity of services being delivered

Increasing use of high cost drugs

Ability to prolong life and save premature infants earlier

New and expensive technologies

Leveraging impact of high stop loss deductibles

29.6

35.7

39.0

42.0

8.810.8

13.0 13.0

3.44.4 5.0 5.0

1.2 1.5 2.0 2.0

0

5

10

15

20

25

30

35

40

45

2008 2009 2010 2011

$300,000

$500,000

$700,000

$1,000,000

Number of claims per 100,000 participants Source: Thompson Reuters - MarketScan

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Factors to consider when buying stop loss coverage

Risk

management

philosophy

There is no “one answer” or algorithm to determine whether to buy stop

loss and how much. Risk management philosophy and cash flow are the

primary determinants of whether to purchase stop loss and how much

protection. Companies with conservative philosophies purchase more

insurance and those companies willing to accept more risk purchase less

insurance or don’t purchase insurance at all. Towers Watson can help

you think through the elements you should consider.

Spread of Risk

Generally, smaller employers have a greater need for protection due to a

higher risk of claim fluctuation. Larger employers have a lesser need

since the size of the group enables a greater spread of risk. Very large

employers often absorb all the risk and eliminate stop loss insurance

completely. Much of the decision goes back to risk tolerance. Towers

Watson can help organizations understand the risk volatility at various

size levels.

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U.S. Medical Stop Loss Deductible Benchmarking – 2013 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers

Watson Stop Loss Purchasing Program)

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U.S. Medical Stop Loss Deductible Benchmarking – 2014 (Prevalence data compiled by collecting book of business information from the partner vendors in the Towers

Watson Stop Loss Purchasing Program)

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What are the different contract bases and what is the

most appropriate contract basis for my program?

Basis Description

Incurred Period

Covered

Example1

Paid Period

Covered

Example1

Claims Not

Covered

Example1

Paid

Covers all claims in a year, regardless of

when the claim is incurred. Generally

available on renewal but not year 1 of a

contract.

Any date 12 months

1/1/14 to 12/31/14

None; all claims

covered.2

24/12

Covers all claims paid in a year that are

incurred during the 24-month period

beginning 12 months before the year

begins.

24 months

1/1/13 to 12/31/14

12 months

1/1/14 to 12/31/14

Incurred prior to

1/1/13.2

18/12

Covers all claims paid in a year that are

incurred during the 18-month period

beginning 6 months before the year begins.

18 months

7/1/13 to 12/31/14

12 months

1/1/14 to 12/31/14

Incurred prior to

7/1/13.2

15/12

Covers all claims paid in a year that are

incurred during the 15-month period

beginning 3 months before the year begins.

15 months

10/1/13 to 12/31/14

12 months

1/1/14 to 12/31/14

Incurred prior to

10/1/13.2

Following are the most common bases listed in order from more comprehensive coverage to less comprehensive coverage.

1Example assumes a 2014 contract year. 2Technically, claims paid after 12/31/2014 are not covered unless the contract renews, which is generally the case.

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Why not just go to my medical carrier for stop loss insurance?

Advantages Disadvantages

Medical

Carrier

Ease of administration for claims

and premium billing.

No stop loss coordination

charges, which occur with an

outside Direct Writer (roughly

$0.50 PEPM).

Not always the lowest cost.

Generally, medical carriers

cannot include coverage for

carve-out PBMs.

Need for multiple contracts if

there are multiple medical

carriers.

Direct

Writer

Lower premium rates.

Coverage for Rx drugs if there is

a carve-out vendor.

Another vendor to manage.

If you want to go with a direct writer, Towers Watson’s Stop Loss Purchasing Program may be of value to you

Medical Reinsurance Transaction

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Reinsurance basics

The medical reinsurance marketplace is even larger than the stop

loss marketplace

Thus, it is generally more competitive than the Stop Loss marketplace

– For one recent client, reinsurance would save 51% over medical vendor stop loss

Towers Watson’s Stop Loss Purchasing Program would save 34% over

medical vendor stop loss

It also tends to use slightly lower medical trend upon pricing renewals

– We are typically seeing 8-10% trend on reinsurance vs. 15-20% on stop loss

But reinsurance can only be purchased by an insurance company

Aha, a captive is an insurance company and can purchase

reinsurance

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Cons

Pros

Most economic value add solution

Even lower future cost due to lower

reinsurance trend vs. stop loss trend

There may be an opportunity for P&C

tax benefits by having SL as 3rd party

risk in the captive

Would be in a position to “easily” move

to a model where the captive takes a

slice of the risk

Provides potentially uncorrelated risk to the

captive

May be possible to use group risk

bearing capacity when one or more

subsidiaries purchase commercial stop

loss to transfer their risk

Too great for the subsidiaries to bear but

well within the risk bearing capacity at the

group level

Additional captive accounting needed

Additional agreements needed

Need to be certain that no employee

contributions are used for stop loss

To preclude need for DOL prohibited

transaction exemption approval

The captive would have to file and issue a

stop loss policy to the plan sponsor

Solvency requirements may increase and

would need to be evaluated if the captive

takes a slice of the risk

There may be a small premium tax,

depending upon state where captive is

domiciled

Direct placement insurance premium tax

might be applicable, depending upon the

laws of the states where employees are

located

Pros and cons of captive reinsurance over stop loss

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Sample premium flow chart for U.S. medical stop loss

Captive Reinsurer

Self-Funded Medical Vendor

Annual Premium January year 1

Annual Premium Charge Back January year 1

Plan Sponsor

C A B

Plan Sponsor Subsidiaries/Divisions

within 30 days after reports received

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Action Steps

Collect claim data and do feasibility analysis to determine whether or not to proceed

with captive reinsurance

Finalize plans and financial arrangements with self-funded medical vendors

If captive reinsurance is desired, kick off reinsurance procurement process by

September of 2015

Review plans and objectives

Create the RFP

Market the program and obtain quotes

Review results of marketing (quotes, contract terms, limitations)

Negotiate final terms and place contract