24 The Self-Insurer | www.sipconline.net

Stop-Loss Captives Seen as Differentiator

Written by Bruce Shutan

Editor’s Note: This is the third of a three-part monthly series leading up to SIIA’s

national conference in October that is geared toward educating insurance brokers and

advisers on alternative risk transfers involving captive insurance solutions. The aim is to

address any concerns and misperceptions, as well as better prepare them to answer

client inquiries about these arrangements, particularly in small and middle markets.

When Bob Madden with Lawley Service Inc. fi rst presented stop-loss captives to fellow brokers at SIIA’s 2010 conference, the reaction was largely silent. But since then, he has noticed it’s piquing the interest of more brokers and stop-loss carriers.

“There are not a lot of people doing this,” he explains.

Offering this alternative funding mechanism paves the way for more

consultative interaction with employer clients, whereas those who stick with

traditional product sales are wedded to “products they can’t control,” says Jeff

Fitzgerald, VP of employee benefits at Innovative Captive Strategies and a member

of SIIA’s Alternative Risk Transfer (ART) Committee.

While there are many different types of captives and complexity involved, he

says stop-loss programs are much simpler to understand than people think. He

likens them to a “well-run self-funded account for mid-market employers trying to

figure out the best way to finance their health insurance exposure, as well as create

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better risk and utilization profiles than they would have without it.”

Another point he raises is that the vast majority of them work through carriers who pay claims “directly and quickly” without wading into esoteric territory. From a risk management standpoint, Fitzgerald describes these captives as “much more straight-forward than, let’s say, a large, single parent captive that’s in a very specific niche, be it energy, finance, or construction with risks the regular market has trouble addressing and it’s a very big exposure to them.”

Mike Madden, division senior vice president for Artex Risk Solutions, Inc. and no relation to Bob Madden, believes medical stop-loss captives offer brokers a better opportunity to distinguish themselves compared to P&C captives.

“The reason I say this for stop-loss group captives is the first part of the definition, which is it’s a stop-loss program,” explains Madden, who’s also a member of SIIA’s ART Committee.

Under most P&C captive programs, he says the group captive reinsures first-dollar policies wherein the captive is responsible for all claims. Under a stop-loss captive, he says there’s also a self-funded plan where the majority of claims activity takes plan and the plan is also an integral part of the employer’s compensation package. While the captive can help employers address claim drivers both below and above the employer’s stop-loss attachment, the stop loss is a separate component – and the primary focus of the captive.

“There is now a self-funded plan that’s not attached to the stop loss that requires management and consultation and that’s where the broker can really shine,” he adds.

Noting that the P&C captive marketplace is very mature with

roughly half of midsize employers using alternative risk transfer or captive programs for their risk management, Bob Madden says medical captives only started to catch on about five to 10 years ago.

Brokers that don’t consider stop-loss group captives for their clients may be missing an opportunity to strengthen their commitment to helping their clients manage risk, as well as elevate their own value by transitioning from pure placement to strategic partner, Mike Madden opines.

Elevating Risk Management

Stop-loss group captives represent a solid long-term strategy for risk mitigation for midsize employers to drive down costs, deliver better cost-containment services and leverage plan utilization, according to Mike Madden. The strength of a group captive is that it collectively dampens volatility, he adds, noting that “if you’re not talking to your clients about this, somebody else is.”

They give employers a better sense of where their medical and prescription drug dollars are going, as well as an ability to capitalize on investments made in employee wellness, population management tools, narrow networks, or other strategies, observes Gene Pompili, SVP

of sales at Roundstone and a member of SIIA’s ART Committee.

Such captives offer a “smoothing mechanism” for small and midsize businesses that have historically been fully insured and subjected to significant volatility based on their size, he says.

Through this arrangement, Pompili explains that they’re moved into a variable cost structure and allowed “to self-fund in a very secure and easy fashion compared to if they were on their own self-funding.”

Bob Madden notes that “relatively small-sized groups may not have the courage, confidence, or understanding yet to take that leap to self-funding, but captives can be kind of a transitional step to be self-funded on your own.”

A stop-loss captive expands access to programs, stability, transparency and accountability as part of a like-minded group of companies that they may not be able to achieve on their own through either the traditional fully insured or self-funded market, Fitzgerald says.

Ideal candidates for a stop-loss captive are mid-market groups with broad enrollment demographics featuring a solid mix of singles and families. “We usually end up underwriting more to what they want to achieve and to their frustration than we do to actually the type of industry that they’re in,” he adds.

In the fi rst of our three-part series on captives, “Five Fast Facts about Captives

for Brokers,” we outlined 10 programs, but neglected to mention that medical

stop-loss, 831(b) and casualty group captives capture anywhere from 70%

to 90% of the mid-market captive activity. This should help brokers who want

to learn more about these arrangements sharpen their focus. In addition, the

sections on ideal candidates for captives, red fl ags and an exit strategy were

heavily weighted toward 831(b) captives at the expense of others, while

an explanation of the captive process inadvertently comingled 831(b) and

separate captive and group captive risk-sharing silos.

CLARIFICATION

26 The Self-Insurer | www.sipconline.net

Leaving the Comfort Zone

But securing the necessary buy

in may be a real challenge. Fitzgerald

says selling customers on a stop-loss

captive requires a “different mentality”

in transitioning from short- to long-

term thinking about managing medical

claims and addressing employee

behavior as part of a partnership

approach with experts in this area.

While brokers and agents may

resist working with captive managers

for fear that they will usurp their

consultative role, he says “we’re there

to accentuate and if we’re doing our

job, then the broker is looking better

than they would without us... Brokers

are our best friends; they’re our

source of business.”

For small and midsize employer

market segments on the fully insured

side, Pompili points out that insurance

The best defenseis a good offense.

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carriers are dictating the terms of broker compensation, whereas it’s a non-issue for brokers who work with a captive manager.

“All we ask is that a broker or an adviser tells us what they are currently making, whether it’s a commission or a fee and we build that into the

price of the proposal,” he says. “So when done properly, it’s a cost-neutral scenario.”

Bob Madden believes many brokers assume commissions aren’t built into captives or some captives may not use brokers. But “if they have a desire to learn about those programs, they can generate a tremendous amount of revenue and respect in the industry because people are going to come to them to learn how to do it,” he explains.

Irrespective of whether 100 or 2,000 employees are involved, Mike Madden says “there’s a tendency for brokers to think of stop-loss almost as a commodity, so there ends up being a focus on premium dollars. The goal with a captive program is to change the mindset from ‘how do I manage stop-loss premiums’ to ‘how do I manage my overall health risk management program.’ So we are beginning to see a paradigm change.”

A larger issue associated with broker commissions is that they’re not always transparent in either fully insured or self-funded markets. “Being part of the

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*#1 independent direct writer stop-loss carrier based on the 2013 year-end Sun Life Stop-Loss premium of $915.2M and our analysis of marketshare data from various third parties. Group stop-loss insurance policies are underwritten by Sun Life Assurance Company of Canada (Wellesley Hills, MA) in all states, except New York, under Policy Form Series 07-SL. In New York, group stop-loss insurance policies are underwritten by Sun Life and Health Insurance Company (U.S.) (Windsor, CT) under Policy Form Series 07-NYSL REV 7-12. Product o� erings may not be available in all states and may vary depending on state laws and regulations. © 2015 Sun Life Assurance Company of Canada, Wellesley Hills, MA 02481. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada.

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consultative sales approach is that you are going to disclose what your fees are and nine-and-a-half times out of ten, your clients are not going to have a problem with it if you’re adding value,” Fitzgerald points out.

He believes the stop-loss captive market will continue to evolve as it has before health care reform in spite of a regulatory movement at the state level to restrict the industry, comparing it with the tax code.

“The reality of it is that I don’t know what the tax code is going to be 10 years from now, but I know there’s still going to be taxes,” he says. “I don’t know what the Affordable Care Act is going to state specifically 10 years from now, but I don’t think it’s going away and I know employers are going to need to address a way to finance their health insurance and ultimately to paying less claims in a manner that is stable and supportable. As long as employer groups are able to self-fund and address through wellness and clinical risk platforms the cost and amount of their claims, then stop-loss captives are going to be a niche part of that.” ■

Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee benefi ts industry for more than 25 years.

Stop-loss captive programs represent a growing market segment with significant business opportunities for employee benefit brokers and advisers, according to the description of an educational workshop at SIIA’s 35th Annual National Educational Conference & Expo on October 18-20th in Washington, D.C.

The session, “What Brokers Need to Know About Stop-Loss Captive Programs,” is one of three sessions on captives tailored to the broker community. An entire educational track on captives will feature eight of the conference’s 40 sessions at the world’s largest event focused exclusively on the self-insurance/alternative risk transfer marketplace.

Speakers will include Mike Ferguson, president and CEO of the Self-Insurance Institute of America, Inc., who will give opening remarks; Lee Davidson, VP of Berkley Accident & Health, LLC, who will be the moderator; Jeff Fitzgerald, VP of employee benefits for Innovative Captive Strategies; and Don McCully, principal of Medical Captive Underwriters.

SIIA NATIONALEDUCATIONALCONFERENCEon STOP-LOSS CAPTIVES