The Opportunities That Captives Bring to Employee Benefits

Employers frustrated with a lack of options and the increased costs of their employee benefits program are beginning to evaluate the potential value of captive coverage. Captives are alternative risk management programs that offer several advantages for well-qualified employers, especially in the areas of cost savings, design flexibility, and claims management. While this risk solution can present new opportunities, it also comes with its own set of challenges and questions that management teams need to address.

An employee benefits captive provides a unique opportunity for a group of like-minded business owners, often from the same industry, to pool their risk. This captive entity is designed to exclusively cover the employee benefits and healthcare costs for participating members. This form of risk pooling brings together like-risk profiles under one entity and provides an alternative solution to managing the costs of health insurance outside of the traditional market.

Considering a Captive

It is important to note that captives may not be the right risk management program for every business. If your organization is looking for more control and stability, here are some things to consider when determining if a captive is the right risk management solution for your organization:

• Premium Volume: In the past, an organization's annual premiums typically would need to reach the $1 million mark to justify the implementation of a captive; however, the volatile healthcare market has led to the development of turnkey captive solutions for smaller businesses. Smaller employers now have access to several options within the captive marketplace, including proprietary AssuredPartners Captive Programs and others managed through our trusted captive administrator partners.
• Claims History: It is important to identify the loss ratio of your claims experience to see if a captive solution can help improve this number.
• Financial Strength: Financial stability is one of the most important criteria when it comes to the viability of a captive. Organizations must withstand fluctuations in claims while maintaining adequate cash reserves.
• Appetite for Risk: Businesses need an understanding of “risk for reward” and be willing to share services, cost containment solutions, and expenses with other companies within your captive who share the same quest for success.

The Advantages of a Captive

When an organization successfully implements a captive as its risk management tool, it can realize several financial benefits. By eliminating the profits and fees typically paid out to insurers, organizations can benefit from large cost savings in comparison to traditional insurance, with an average of 10% captive distribution; 6% average stop-loss increase. In addition, the premiums paid into the captive can be leveraged to fund investments for the organization, resulting in additional income generated to fund potential future claims. Claims savings from leaving traditional plan types resulted in an average of $1,200 per employee per year for the employer.

Captives also bring increased flexibility and control regarding overall plan design, reporting, and the claims management process. Since premiums are paid upfront, claims can be paid as they occur, resulting in a reduced lag time, improved claims processing efficiencies, and cash flow management.

When an organization operates its own risk management tool, it has greater autonomy in designing benefit plans tailored to its specific risk pool, including the ability to determine the plan's conditions and variables, including deductibles, coverages, and definitions. This heightened oversight leads to more proactive risk management practices and the ability to get more in-depth claims analysis. Greater insight into claims brings the opportunity to increase targeted interventions and cost reductions through fraud prevention.

Reduced exposure and increased insulation from market variability are also benefits of operating under a captive. Traditional insurance program funding exposes organizations to the marketplace's volatility, leading to a lack of control over premium rates, resulting in fluctuations in the premium being transferred to employees. Captives provide members the opportunity to smooth some of the larger bumps often felt in traditional funding when cycling markets harden and soften. Increased control over risk management's financial aspects allows for steadier and more accurate planning regarding an organization's overall healthcare spend.

Determining if a captive is the right solution for your organization requires careful thought and consideration of your organization's overall strategic plan. If your organization is interested in exploring potential captive opportunities, connect with your AssuredPartners team to learn more and begin the evaluation process.