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, Milliman
Mark Smidt – Director, EBMS Re
Kyle Plath – Senior VP, Trean Re
Wednesday, September 28
1:30 – 2:45 pm
Agenda
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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
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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
Using Captives to Smooth Out Medical Stop-Loss Insurance Expense
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
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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
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
“Leverage Trend” offset at the Captive’s risk layer 2002 = 150k multiplied by 10.5% (8) = 368k
Current Specific Risk Assignment
XS Reinsurance $Unlimited xs $20M
XS Reinsurance $10M xs $10M
XS Reinsurance $5M xs $5M
XS Reinsurance $3M xs $2M
XS Reinsurance $1M xs $1M
XS Reinsurance Risk Layer - Up to $1million xs of EBMS Re’s Retention
EBMS Re’s Risk Layer - First $300K above SIR
Plan Sponsor's Risk Layer = Spec Deductible/SIR
Gross Premium by Underwriting Year
(Millions)
$14.00
$11.53
$11.44
$11.39
$12.06
$12.00
$9.73
$10.00
$8.38
$8.00
$5.79
$6.00
$4.34
$4.00
$2.92
$2.00
$0.00
2002
2003
2004
2005
2006
2007
2008
2009
2010*
ESTIMATED
Average Specific Deductible by UY
(Weighted by Employee Lives)
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$2002
2003
2004
2005
2006
2007
2008
2009
2010
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
30%
15%
15%
15%
5%
20%
Final
Adjustment
Maturity Period
30%
15%
15%
15%
5%
20%
Maturity Period
30%
15%
15%
15%
5%
30%
15%
15%
15%
Maturity Period
30%
15%
15%
30%
15%
UY 2003:
Maturity Period
UY 2004:
UY 2005:
UY 2006:
Maturity Period
UY 2007:
UY 2008:
Maturity Period
UY 2009:
Maturity Period
30%
2002 to 2009 Combined Allocation of Income
(Inception to Date)
Program Flow Chart
Benefit Plan
Stop Loss Policy
EBMS
Stop-Loss Administrator
Administration
Agreement
Premium
Discounts
Net Results
EBMS Re
“Pooled”
EBMS Captive (Reinsurer)
Issuing Carrier
Stop-Loss Carrier
Excess of Loss
Reinsurance
Contract
Excess- Loss Reinsurer
Quota Share
Reinsurance
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 Structure
Issuing 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???