Jason Nordby, M3 Insurance
3 April 2020Services

Captives in the age of COVID-19

Only a few weeks into the COVID-19 pandemic, the impact on individual businesses and the global economy is already starting to become clear. Early questions about things such as how to protect employees and provide relevant resources have largely been answered. Now, colleagues and business partners are turning their attention to another question: how does this impact healthcare captives?

There is no one-size-fits-all answer to this unprecedented situation. However, we can analyse some short and long-term factors that will impact businesses who buy health insurance, and provide considerations that will assist businesses in deciding how they will purchase their insurance moving forward.

How will underwriters treat anomalies in the healthcare delivery system?

As this pandemic plays out, routine services have ground to a halt to minimise overcrowding in the healthcare system. Utilisation through early to mid-summer will be artificially minimised, as previously scheduled routine appointments are delayed or cancelled altogether.

When the pandemic winds down, there will likely be an influx of these backlogged services at, or around the time of, the annual renewal cycle. Its timing will almost certainly coincide with an economic recession. Normal underwriting principles will likely have to be modified to account for the current status of the healthcare system, but also the services that have been put off into the future. We will be entering an uncertain renewal cycle, with perhaps an even less certain or predictable short-term future.

“We will continue to see businesses who are feeling stuck in a fully insured environment seeking out health captives as a solution.”

In an uncertain time, I believe certainties and facts should prevail. As a business owner, I would want changes in price to be determined by data—my data. I would want to be able to make strategic decisions about change based on this data.

A captive affords businesses this data. In this sense it is unlike a traditional fully-insured funding arrangement, where the insurance carrier is taking on the business’ risk and doesn’t provide individualised data. This tradeoff is usually something that businesses willingly pay for. However, the uncertain state of the market could force them to pay much more for it in the future.

Pandemics and purchasing practices

The relative abrupt arrival of the pandemic, and the impact it has had on businesses that were thriving in a strong economy just a few short weeks ago, has been eye opening for many. Long term, there are many questions about what this will mean.

  • Will the healthcare system as we know it today be changed by all of this? (Almost certainly: yes.)
  • Will there be a recession? (Almost certainly: yes.) 
  • Will we enter into a potentially inflationary environment with the influx of several trillion dollars into the economy through the federal stimulus? (Possibly.)
  • Will these factors drive up insurance costs and force businesses to be more creative and embrace newer or better models for influencing risk and stabilising costs? (I would think so.)

Short and long-term factors will both require businesses to take a smarter approach to purchasing their insurance. There is an opportunity for forward-thinking business owners to find ways to stabilise cost and embrace data. They should embrace innovative ideas to better tackle healthcare cost drivers and thus health insurance.

So, how does this affect health captives?

The signs point to growth for the captive insurance industry. We will continue to see businesses who are feeling stuck in a fully insured environment seeking out health captives as a solution. We will see even greater growth in the captives space from businesses who are currently self-funded, as they look to achieve greater stability and ownership in their stop loss performance and pricing.

The COVID-19 pandemic is changing the way businesses are thinking about purchasing health insurance, but it is not changing the reasons why businesses choose a healthcare captive. If anything, it is highlighting the benefits of that choice.

Jason Nordby is a partner and director of the employee benefits captive practice at M3 Insurance. He can be contacted at: jason.nordby@m3ins.com