How group benefits captives are changing the game for small and midsize employers

In the volatile world of healthcare benefits, small and midsize companies are increasingly joining employee benefit captive insurance companies. These cooperatives allow businesses to gain more control over healthcare benefits while reducing expenses, often 5% to 15% less than a fully insured plan in the long term.

Captives offer an alternative to what many smaller companies view as an unattractive choice: purchasing a fully insured plan with prescribed, state-mandated benefits from a carrier or creating their own self-funded plan.

Fully insured plans involve a company paying a fixed annual premium to an insurance carrier, which handles claims and administration. Smaller companies often end up covering unnecessary benefits for their members, and premiums can increase dramatically at renewal.

Companies that choose to self-insure their health plan will need the financial fortitude to withstand volatile shifts in cash flow. Most self-insured firms buy stop loss insurance to cover high claims, but premiums can increase significantly each year.

For companies with 50 to 1,500 employees, captives can offer a safer path to self-funding by pooling stop loss risk with other like-minded employers. Many clients find at least as much savings as traditional self-funded plans, with much less claims-cost volatility. By leveraging their purchasing power, captives can also negotiate better deals with vendors, share cost-saving ideas, and streamline administration for smaller employers.

Here are answers to six common questions about captives:

1) How do captives work?

Captives are insurance companies owned by the employers in the program. Although captives can generally cover any commercial risk, here we’re talking about providing employee benefits, most commonly medical stop loss insurance.

As part of a captive, an employer pays the first portion of members’ claims and buys stop loss coverage to cover claims exceeding set limits. With a captive, there is a mezzanine shared layer of risk, where the captive pools stop loss premiums and claims from participating employers, then transfers the larger claims to traditional stop loss coverage.

2) Why are fully insured employers joining captives?

• Increased profitability. In favorable claims years, the employer can benefit from a surplus in the captive, receiving excess funds as a dividend, rather than the carrier keeping the profit.
• More control. For smaller companies, the plans available from insurance companies may include features and benefits that employees don’t need or use. A captive allows companies to design the program that is right for them.
• Lighter tax burden. Most states impose a tax between 1% and 4% on premiums paid to commercial insurance companies. With captives, these taxes are lower.
• Transparency. With a captive, employers have full visibility into claims and other plan expenses.

3) Why are self-funded employers joining captives?

When employers participate in a captive, they get the advantages mentioned above while avoiding some of traditional self-insurance’s downsides.

• Offsetting of risk. In years when high-cost claimants are prevalent, the risk is pooled with other captive members who are having a favorable claims year to help dampen the impact to the employer.
• Premium rebates. If claims paid are lower than expected, the captive may refund premium surplus funds to members, use the excess to offset future expenses, or allocate it to programming that benefits all captive members.
• Collective buying power. Captives can negotiate for better rates and terms with third-party administrators, pharmacy benefit managers, and other cost management vendors.
• Enhanced stop loss terms. In a world where ‘no new laser’ (individual-specific deductible) and rate cap provisions can be difficult to procure or can be amended annually, many captive programs will offer these provisions in perpetuity. This reduces surprises at renewal and helps minimize plan volatility.
• Collaborate with like-minded peers. Join a program with other employers who are committed to managing their program spend and want to provide better benefits at a more affordable price point.

4) What are the potential downsides of joining a captive?

Joining a captive is a commitment. Employers will need to…

… contribute capital. Companies must put funds — typically 7% to 20% of annual stop loss premiums — into a capital or collateral account meant to cushion against unexpected expenses.

… expend management time. Captives want assurance that company leaders, especially CFOs, are dedicated to managing healthcare costs, as all draw from the same pool for claims. Participating businesses must monitor employee health and expenses and address arising issues.

… assume extra risk. As with any business, there’s no guarantee a captive will succeed. It's essential to work with a well-established captive that has strong underwriting standards and a proven history of management and profitability.

5) What are the differences between captives?

The ranks of group benefits captives have expanded rapidly. They employ a variety of approaches, so it’s essential for a company to find one that aligns with its risk profile and employee base. Differences to consider include:

• Flexibility. Some captives enable participants to design a benefit plan with a choice of providers, e.g., administrators, medical network, pharmacy benefit managers, etc. Others want to steer employers to a smaller array of options with which the captive has negotiated pricing and programs. These pre-assembled plans can appeal to smaller companies that may feel overwhelmed with the freedom to select vendors and program to manage their plans.
• Selectivity. One segment of captives is focused on achieving maximum cost savings and is therefore selective about the companies they allow to join. In fact, the most selective captives only accept about one-third of the companies that apply, but they often provide the largest premium rebates at year’s end. To get approved, employers need a healthy employee base and a leadership committed to aggressively managing costs.
• Size. While some captives have thousands of members, others, especially those just starting, may only have a handful. Employers, especially those concerned about their investment, are generally advised to go with larger, more diversified captives. On the other hand, joining a startup can give a company more influence over how the captive operates.
• Sponsor. An outside company usually manages a captive’s operations. Sometimes these managers are independent consultants hired by the captive founders. Increasingly, though, captives are sponsored by larger organizations, e.g., brokers, consultants, insurance carriers, and even private equity funds. Each sponsor can bring potential skills, synergies, and conflicts of interest that you should consider.

6) What’s next if we’re interested in joining a captive?

• Make sure you’re prepared to make a multi-year commitment. Most companies experience a decrease in healthcare costs during their first year of joining a captive insurance program, and these savings tend to build over time. For example, a typical company transitioning from a fully insured plan may reduce its costs by 5% in the first year. Over a span of 10 years, these savings can grow, resulting in a decrease of more than 15% compared to what the company would have paid if it had not made the switch.
• Get a consultant with experience working with captives. You’ll need expertise in evaluating the many available captives and scrutinizing their financial health. More importantly, you want to work with a consultant that has the analytical chops to evaluate your member and claims data and recommend the best ways to keep your costs under control.

How Alliant Can Help

Alliant has helped over 100 small and mid-size businesses move into a captive program. We have the analytic tools you’ll need to get the most value from your captive program. And we’re not in the business of managing captives, so we can offer genuinely objective advice and recommendations.

Take control of your benefits programs through Alliant’s innovative funding solutions and shield your organization from risk. Find out more.