Employee Benefits and Healthcare – Current Captive Impacts Presented by: Moderator: Anne Marie...
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Transcript of Employee Benefits and Healthcare – Current Captive Impacts Presented by: Moderator: Anne Marie...
Employee Benefits and Healthcare – Current Captive Impacts
Presented by:
Moderator: Anne Marie Towle, CPA, VP & Senior Consultant, Willis
Troy Filipek, FSA, MAAA – Principal and Consulting Actuary, MillimanMark Smidt – Director, EBMS ReKyle Plath – Senior VP, Trean Re
Wednesday, September 28 1:30 – 2:45 pm
Agenda• Healthcare Captives – Why and how?• Impact of Healthcare Reform (PPACA)• Case Study – EBMS and Trean Re• Discussion and Questions
Healthcare Captives• Why Captives for Healthcare? Similar as for other
lines of business . . .– Reduced insurance expenses
– Possible tax efficiencies
– Cash flow management
– More efficient use of capital (i.e., float)
– Ability to develop custom insurance programs – more flexible than commercial market
Healthcare Captives
• But healthcare is also different . . .– Short term vs long tail expenses
– Generally predictable claim patterns
– Uncorrelated exposures relative to traditional risks held in captives
– PPACA pressures
Healthcare Funding• Three types of funding mechanisms traditionally
– Fully insured – All risk transferred through premiums
– Self insured – All risk retained; use health plan to access network and pay claims
– Hybrid – Self insure with stop loss (aggregate and/or specific) to transfer catastrophic risk
• Stop Loss– Specific – Per person catastrophic
– Aggregate – Total employer costs
Option 1: Jumbo Employers
• Works for sponsors with > 10,000 ees• Huge advantage to already have a captive in place that
insures other uncorrelated risks
• Option 1a - Medical stop loss coverage only – Generally includes steep risk margin in commercial market– More later in case study
• Option 1b – Reinsure ERISA benefits (e.g., group life, disability, AD&D)– Employer acts as reinsurer and needs Prohibited Transaction Exemption (PTE)– Administrative and regulatory requirements big
• Results– Lower costs for same protection– More premium and spread of risk in captive
Option 1: Jumbo Employers
• Administrative and Regulatory Issues– DOL must approve PTE under Option 1b since ERISA prohibits
economic gains from providing benefits• Need A-rated fronting insurer per DOL• Need competitive rates and year 1 benefit enhancement
– Capital and surplus requirements
– Need competencies in running captive
– Beware NAIC tightening of stop loss model law – Forces employers of all sizes to retain larger portion of risk
Option 1: Jumbo Employers
• PTE Process (Option 1b)– Conduct feasibility study (cost/benefit analysis)
– Get help fast• Captive manager• Attorneys• Independent fiduciary – Opine on PTE compliance
– US branch approval – domiciled jurisdiction if not a US captive
– Negotiate contract with A rated fronting insurance company
– File for PTE with the DOL and implement plan
Option 2: Smaller Employers
• See some sponsors with < 100 ees push to self funding under PPACA
• Pool together risks across employers
• Hybrid funding noted earlier – stop loss through captive
• Historically, RRGs used to get around state licensure requirements, but state lawsuits slowed this trend
• Employer specific self funded plan, attachment point, pricing, etc.
• Results– Lower costs than fully insured– Lower costs than commercial stop loss
PPACA Influence• PPACA – Health Insurance Reform
• Costs continue to rise and many fear PPACA makes it worse
• New issues and concerns– No annual or lifetime benefit maximums– New mandates (e.g., $0 preventive with expanding definition)– New entities – Exchanges, Co-ops, Accountable Care Organization, etc.– New regulations (e.g., no medical underwriting, minimum loss ratios) and
fees (e.g., insurer fees)
PPACA Influence• Employers - Much more interest in self-insuring to:
– Avoid community rating for groups with better than average risks
– Avoid fees imposed on fully insured plans
– Avoid benefit mandates
– Take advantage of new offerings from savvy brokers and carriers
PPACA Influence• Other entities
– Provider groups / ACOs: Historical management of financial risk did not go well, consider other options with financial risk coming back
– Co-ops: Not for profits established to compete with insurers, likely will need help with risk management / transfer / funding
Using Captives to Smooth Out Medical Stop-Loss Insurance ExpenseUsing Captives to Smooth Out Medical Stop-Loss Insurance
Expense
Mark Smidt – Director of EBMS Re
Kyle Plath – Senior VP of Trean Re
Time-Frame EBMS Entered the Stop-loss
Arena – 1999-2000
• Significant Cost Adjustments from Stop-loss Insurance Markets– Stop-loss Carrier’s Actions to Correct Soft-Pricing Included:
• Lasers• Steep Renewal Increases• Non-Renewals
Objectives of EBMS’ Captive Program• Stabilize Stop-loss Insurance cost through:
– Eliminating lasering and non-renewals– Pooling the risk
• Renewals based on actuarial models, not individual experience rating = effectively eliminating spikes
– Profit sharing – achieved thru renewal discounts (Premium Discounts)– Create efficiencies by eliminating duplications of efforts– Specific Reimbursement turnaround times – reimbursement authority– Renewals able to be “locked-in” based on 10 months of experience– Create a “partnership” atmosphere for clients – Annual “Advisory Meeting” – Access to underwriting staff
Captive’s Risk Layer
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
“Leverage Trend” offset at the Captive’s risk layer 2002 = 150k multiplied by 10.5% (8) = 368k
Current Specific Risk Assignment
Plan Sponsor's Risk Layer = Spec Deductible/SIR
EBMS Re’s Risk Layer - First $300K above SIR
XS Reinsurance Risk Layer - Up to $1million xs of EBMS Re’s Retention
XS Reinsurance $1M xs $1M
XS Reinsurance $3M xs $2M
XS Reinsurance $5M xs $5M
XS Reinsurance $10M xs $10M
XS Reinsurance $Unlimited xs $20M
Gross Premium by Underwriting Year (Millions)
2002 2003 2004 2005 2006 2007 2008 2009 2010*$0.00
$2,000,000.00
$4,000,000.00
$6,000,000.00
$8,000,000.00
$10,000,000.00
$12,000,000.00
$14,000,000.00
$2,918,674.10
$4,336,464.50
$5,792,155.91
$8,375,347.76
$9,734,592.04
$11,529,388.02$11,437,958.00$11,393,293.00$12,057,745.00
ESTIMATED
Average Specific Deductible by UY(Weighted by Employee Lives)
2002 2003 2004 2005 2006 2007 2008 2009 2010 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Premium Credit Triangle – Block
Calendar Year:
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Client’s % of Total Prem
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
UY 2002: Maturity Period 30% 15% 15% 15% 5% 20% Final Adjustment
UY 2003:
Maturity Period 30% 15% 15% 15% 5% 20% Final
Adjustment
UY 2004: Maturity Period 30% 15% 15% 15% 5% 20%
UY 2005: Maturity Period 30% 15% 15% 15% 5%
UY 2006: Maturity Period 30% 15% 15% 15%
UY 2007: Maturity Period 30% 15% 15%
UY 2008: Maturity Period 30% 15%
UY 2009: Maturity Period 30%
2002 to 2009 Combined Allocation of Income(Inception to Date)
Program Flow Chart
Benefit Plan
EBMSStop-Loss Administrator
EBMS Re EBMS Captive (Reinsurer)
Issuing CarrierStop-Loss Carrier
Excess- Loss Reinsurer
Net Results
“Pooled”
Stop Loss Policy
AdministrationAgreement
Quota ShareReinsurance
Contract
Premium Discounts
Excess of LossReinsurance
Contract
Considerations in Forming a Captive
• Domicile – EBMS originally selected Cayman Islands and redomesticated
to Montana
• Captive Structure – EBMS originally formed as a single cell captive and has
transitioned to a segregated cell structure in Montana
Considerations in Forming a Captive
• Capitalization and Ownership– EBMS chose to fund the start-up capital and maintain 100%
ownership of the captive
• Risk Structure– EBMS purchased Specific Excess Reinsurance from the
inception of the program, increasing its retention as the premium volume has grown
EBMS Re’s StructureIssuing Carrier
– Excess Loss Carrier (or Issuing Carrier) on the program– Has given the Captive the authority to underwrite and issue stop-loss
policies in their behalf– Maintains the necessary ratings and licensures for the captive to operate. – Contracting body for the program’s reinsurance carriers & ensures the
financial integrity of the entire program
EBMS Captive– Quota Share reinsurance company on the program as well as the
underwriting body
Professional Reinsurer– Provides Excess Loss reinsurance coverage for the program
…cont.
EBMS Re’s Structure
Trean Reinsurance Services
– Program’s Reinsurance Intermediary. Facilitates the “marriage” of all the carriers and reinsurers associated with the program
EBMS
– Staffing support in: underwriting, policy issuance, administrative support, claim auditing, management, marketing
– Capital Investment
Questions???