A&H solutions for optimising captive risk assumption
Over the past decade, medical stop loss (MSL) has been the predominant accident & health (A&H) line held within captives. More recently, we have seen increasing applications of other A&H and employee benefit coverages being used to augment the utility and, in some cases, innovatively protect the surplus of established property & casualty (P&C) captives.
Among these growing segments are the addition of (i) fully-insured organ transplant coverage for MSL group captives; and (ii) special risk accident (SRA) coverage by public entity and scholastic captives, risk retention groups (RRGs) and self-insured risk pools.
Organ transplant for MSL group captives
One of the most basic principles of any alternative risk programme is being able to assume predictable, or known, segments of risk while transferring more unpredictable, or unknown, risks to insurers. The premise is that an expected risk can be budgeted and held more efficiently as a retained risk by the employer rather than transferring it to an insurer at a higher-cost fixed premium.
Any employer that is self-funding employee benefit medical coverage will invariably incur a large ongoing claim that is likely to be “lasered” by a stop loss carrier.
What is lasering?
Within self-funded medical programmes, individuals with serious ongoing medical conditions that are likely to incur large expenses related to those conditions, are considered to have “known” risks that are frequently given a higher deductible by a stop loss carrier in relation to the rest of the insured population.
An example of this is an organ transplant (OT), among the most expensive and most frequently “lasered” medical procedures within a self-funded medical programme. Isolating those individuals who may require such a transplant for a higher deductible is known as “lasering” and is a common practice in the medical stop loss industry.
The OT “carve-out” solution
Nearly 35,000 OTs are conducted annually to provide lifesaving chances to patients. A new person is added to the national transplant list every 10 minutes, and each of the past four years has produced a new record for the number of OTs done. The cost for an OT ranges from $250,000 to more than $1.5 million. While lifesaving for patients, transplants are highly unpredictable and can be financially devastating for self-funded health plans and MSL captives.
The typical MSL group captive member, with fewer than 500 employee members, may not have the financial agility to comfortably absorb a significant laser and the financial impact that is typically associated with an OT. Some group captives may try to absorb lasers for members, but these “no laser” provisions need to be adequately funded with surplus to ensure stability, as it may only take a few large claims to deplete financial reserves.
A solution is OT “carve out” coverage, which protects self-insured employers and group MSL captive members from these potentially catastrophic claims by reassigning transplant-specific risk to a fully-insured policy (Table 1). Changing the risk profile of individual group captive members to eliminate transplant exposure helps protect surplus and increase the profitability potential of the captive.
Fully insured transplant coverage is not expensive, and most stop loss carriers will provide stop loss rate credits to groups having OT coverage. These rate credits are often significant enough to offset most, and in some cases all, of the cost of the OT coverage. Transferring transplant exposure and eliminating their related claims will also favourably impact the stop loss renewal terms.
Table 1: Potential benefits of fully-insured OT “carve-out” coverage for an MSL group captive
- Eliminate transplant-related lasers
- MSL re/insurers will discount specific stop loss rates
- Reduce MSL loss ratios for more favourable renewals
- Significant benefit upgrade to the employer’s plan document
- Potential enhancement for cash flow and budgetary certainty
- Protect the captive surplus
- Enhanced potential for increased dividend distributions
- Enticing benefit to new and existing group captive members
Many OT “carve-out” policies will feature first-dollar in-network coverage with no deductible. Benefit limit options are typically $1 million, $2 million and unlimited. Access to a nationwide network of recognised centres of excellence facilities will further optimise patient care and outcome success. As mentioned earlier, transferring potentially catastrophic risk away from group captive members at a low or offset cost, supports basic alternative risk prudency guidelines.
In many cases, group captives have been using captive surplus to provide the coverage as a benefit enhancement to members.
SRA coverage for public entity and scholastic captives
Another area which is seeing significant A&H product expansion is in public entity and scholastic captives, RRGs, and self-insured risk pools. These liability-oriented entities are increasingly purchasing SRA coverages as an effective risk hedge and to protect a captive or pool surplus against possibility of potentially larger liability claims resulting from litigation.
SRA coverage consists of two broad segments—Participant Accident insurance (PAI) and Student Accident insurance—and typically provides accident medical expense (AME) and accidental death & dismemberment (AD&D) coverage to participants in activities sponsored by the insured. Providing coverage for the accidental injury or death of participants of a sponsored event through an accident policy can significantly reduce exposure to an entity’s general liability coverages.
An injured party is much less likely to initiate litigation against an activity sponsor if the sponsor agrees to cover the medical expenses of the injured participant. SRA coverage is normally written on a “blanket” basis for all activities, regardless of fault. In terms of public entities, this includes PAI for: municipal recreation activities, seniors centres, youth sports leagues, special events, day camps, etc.
Student Accident coverage would encompass school-sanctioned activities such as interscholastic or intramural sports, clubs, field trips, etc. General liability carriers are increasingly asking, or even requiring, their public entity and scholastic clients to purchase SRA coverage to mitigate liability exposure.
We are increasingly working with risk pools and captives that deploy pool surplus to cover the SRA premiums on behalf of their members. This has become especially important for liability policies that have med-pay gaps or exclusions.
In most cases, captives, RRGs and risk pools will deploy surplus to purchase a separate fully-insured SRA policy; however, we are seeing increased interest with some captives and risk pools that are not RRGs in assuming SRA risk on a quota share basis within their alternative risk structure. Risk share is more prevalent with the scholastic and higher education captives where the Student Accident coverages generate higher premiums than the public entity PAI coverage will typically generate.
As the distinctions separating some P&C and A&H coverages within captives continues to blur, we can expect increased crossover relevance and an expansion in applications that are being innovatively adopted across traditional borders within the alternative risk world.
Phil Giles is vice president, sales & marketing, Accident & Health, QBE North America. He can be contacted at: phillip.giles@us.qbe.com.
