Managing the medical bills

Group medical stop loss captives are coming of age. Back in the 1990s, captive insurance clients tended to be straight-ahead property and casualty pure captives and risk retention groups writing professional liability. Today, many of them are group medical stop loss programmes, particularly fronted cell programmes.

For many years, US employers have struggled with the rapidly rising costs of providing health insurance to employees. Cost control strategies usually involve increasing the employees’ share of the cost via premium contributions, and by raising deductibles and co-pays, tweaking benefit levels, providing “go-away gifts” for non-participation and switching providers every couple of years.

However, today an increasing number of mid-sized employers are forming group medical stop loss captive programmes to help them control costs, temper renewal increases, and allow them to participate in favourable underwriting results.
Large US employers have been self-insuring employee health insurance for years, purchasing stop loss coverage to limit their exposure to catastrophic claims experience. Carriers and brokers are now working with groups of mid-sized employers to form medical stop loss captives that allow for the sharing of losses in a layer above a specific deductible per claim.

In this instance the carrier retains the specific excess layer as well as providing aggregate stop loss protection. The three layers are sometimes referred to, from the employer’s perspective, as “Me, Us, and Them”.

How it works
A simple example of this type of programme would be a group of 15 employers in a related industry, with each employer having anywhere from 150 to 400 insured lives. A captive could be set up to insure a predetermined layer of risk, say $250,000, above an individual employer deductible, that could vary based on the size of the employer.

Claim costs above the captive layer would be retained by the excess carrier, which would also agree to cover claims that exceed 125 percent of expected aggregate losses under the programme. The aggregate excess per individual employer can be covered either in the captive layer or retained by the carrier. In either case, the captive aggregate would not exceed the 125 percent (or some other predetermined percentage) of expected.

The captive would be funded by premiums ceded by the carrier into the captive, with premiums, net of expenses, being equal to actuarially-expected losses in the captive layer. The loss fund may be retained by the carrier (funds withheld) or held by the captive in a NY Regulation 114 trust. Members would also be required to post collateral for the difference between expected losses and the captive’s maximum aggregate obligation, either in the form of additional cash or letter of credit. Such funding is often referred to as “gap collateral”.

When the policy year closes out (usually six to nine months after the end of the year), any favourable underwriting result (funds remaining in the loss fund after all claims are closed) would be returned to the insured member(s) in accordance with a predetermined allocation formula. To the extent that claim payments exceeded total net premium, the carrier would draw down collateral to fill in the gap.

With an ongoing programme, collateral for the second year may have to be provided at renewal, which would be prior to the final accounting for the first year. This overlap is known as “collateral stacking”. Assuming favourable underwriting results, year 1 collateral will be released prior to the second renewal and would be available to support year 3. In some cases, carriers may allow collateral to be rolled over to the renewal year providing it’s adjusted upward to reflect programme growth.

Fronted medical stop loss captive programmes have proved to be an excellent tool for helping middle-market employer groups take a more active role in managing healthcare costs and participate in favourable results, while maintaining protection from shock losses.

Dave Tatlock is director at SRS Vermont. He can be contacted at:  dave.tatlock@strategicrisks.com