When the captive fits: the healthcare and employee benefits marketplace
Captive structures are well recognised as cost-effective, efficient vehicles to manage employee benefits (EB) programmes including healthcare, especially in regulating the impact of peak claims globally and in reducing premium volatility at a local level.
In addition, utilising advanced data analytics within the captive model, it is possible to glean powerful insights, drive further efficiencies and lower future claims volumes.
Forensic analysis of claims data provides insights that can be translated into proactive health interventions driven through programmes and plan design, to target specific issues that are driving up costs. Securing control over both data and plan design, captives can optimise design and influence the behaviour of insureds and the providers, as well as drive proactive health and wellness initiatives.
As a result, medical costs can be significantly reduced—obviously advantageous in an era where health inflation is driving up the costs of schemes across the globe.
Expanded captive programmes
Corporates are increasingly including medical policies within their global captive programmes, largely because of a shift towards stronger governance procedures. Due to the high frequency of claims and low claim amounts, margins on healthcare programmes are traditionally small. The risks are well understood, with experienced underwriters typically able to get the risk premiums to almost match the claims amounts for large populations.
“Employee benefits captives would normally have the capacity to fully reinsure medical plans without the need for extra protection.”
For this reason, companies that had a strong focus on margins in the past intentionally did not include medical policies in their global programmes. However, the need for stronger governance combined with a desire to better understand cost drivers and limit exposure to medical trends has led corporates to re-think their strategy and medical policies are being increasingly wrapped within a global captive arrangement.
When using a captive model for healthcare or EB it is important to maximise management effectiveness by partnering with a network that can produce the deep level of analytics needed to maximise the benefit of using a captive structure. These can be interrogated to establish the drivers behind medical trends in various countries. Firms operating captive schemes can benefit by relying on networks for reinsurance and data aggregation.
Insights from data analysis should inform three actions: (i) optimisation of local plan design; (ii) complementing provisions under the local policy with impactful global programmes, such as tele-medicine, second medical opinion, and employee assistance programmes where required; and (iii) the design and implementation of wellness programmes that are capable of influencing and sustainably changing employee behaviours.
As it is still not commonplace to reinsure healthcare benefits via a captive, there is the potential for significant growth in this area. Despite growth in recent years there are fewer than 100 EB captive programmes in place today compared with the approximately 7,000 captives across all sectors in the world. While as ever in the captive marketplace the first movers remain predominantly the large global multinationals, there is scope for these arrangements to be applied in the mid-market.
There are few markets outside the US in which medical peak claims require attention and dedicated risk management. Outside these few countries, claims volatility is not a concern and EB captives would normally have the capacity to fully reinsure medical plans without the need for extra protection. In these markets the focus when managing exposure is on medical cost trends and utilisation.
There has also been discussion, particularly in the North American, Middle Eastern and Asian markets, about the potential for the increased application of lasering (identifying individuals for a higher stop loss deductible by establishing their predisposition for certain illnesses), through the increased application of medical data—but this does not come without its risks.
There is a risk to the employer brand and employee morale, for instance, if the reasons behind such services are not communicated well. Employees, in those regions, may feel they are being singled out or overly monitored, which could impact morale and productivity.
However, if there is effective communication around why the services are being offered and employee privacy is highlighted, there should be no impact on employer brand other than a positive one (this isn’t really an issue in European markets, however).
There has also been discussion of increasing numbers of global multinationals working together to develop their own healthcare solutions for employees, following the model of American multinationals. Amazon, Berkshire Hathaway and JPMorgan Chase & Co recently announced they are jointly developing a healthcare solution for their US employees through an independent company free from profit-making incentives and constraints.
However, the delivery of medical programmes is very local and market practices are vastly different. The industry will be watching carefully to see whether this new model succeeds. While in the American market we may see this type of collaboration emulated, it is unlikely to occur except in a few select markets and not on a broader/global scale.
Challenges facing captive models for EB
The question has been posed as to whether there are multi-jurisdictional issues with healthcare and EB captives. This, perhaps, demonstrates a lack of understanding of the model being established. EB captives typically receive their risks from the single central reinsurer of the EB network they are using. Due to the licensing requirements and limitations to non-admitted/offshore business in the EB market the concept of master policies does not exist.
When challenges do arise, it is typically because of regional regulators changing localised legislation and/or imposing restrictions on reinsurance and flows of capital. Due to the high frequency, short-tail, nature of the medical business there are not typically challenges with respect to solvency regimes or reserving approaches.
At MAXIS we use reinsurance treaties (country and captive treaties) that are concluded under the same governing law and with the same arbitration clauses to avoid any legal exposures. There are still some excluded markets, where countries do not permit the establishment of reinsurance arrangements or with no local insurance infrastructure.
Healthcare captives are recognised as an effective mechanism to cover “contingent” workforces, eg, those part-time, personal and temporary employees who may not fit standard employment patterns and contracts.
Captives in the EB and healthcare marketplaces also have additional benefits when it comes to covering non-conforming employees, such as those contracting or working part-time. Reinsurance provides the option to implement non-standard programmes, provide benefits that are not necessarily market practice (if legally compliant and feasible from a service delivery point of view), to ensure coverage for employees who otherwise might be excluded from such schemes.
This ultimately comes down to a company’s strategy from HR and financing/risk management perspectives.
Matthias Helmbold is head of technical and services at MAXIS GBN. For more information visit https://www.maxis-gbn.com