Stop-loss and P&C in captives: trends, strategies, and best practices
Prabal Lakhanpal (pictured left) and TJ Scherer (pictured right) of Spring Consulting Group provide a guide to how medical stop-loss has become integrated into captives.
Captive insurance has increasingly become a vital strategy for organisations looking to manage, diversify, and efficiently finance their risks. A growing trend is the integration of medical stop-loss and property and casualty (P&C) insurance into captives.
This approach offers significant benefits, including cost control, risk diversification, and improved enterprise risk management. Prabal Lakhanpal and TJ Scherer, leaders at Spring Consulting Group, provide insights into this evolving landscape, highlighting why more organisations are adopting this strategy and how it can enhance overall risk management and employee benefits programmes.
“Most captives want carriers who have the ability to think strategically from a partnership standpoint.” Prabal Lakhanpal
The growing trend of stop-loss in captives
The adoption of stop-loss insurance within captives has seen substantial growth in recent years. According to Scherer: “As stop-loss grows exponentially in the US using captive strategies, clients that have a captive are looking to add that for the diversification properties, as well as a total enterprise risk management component.”
This trend is driven by the rising costs of stop-loss insurance, making it a significant expense that organisations need to address through innovative strategies.
Lakhanpal added that the cost per employee has increased substantially over the last 15 years. “Bringing stop-loss into captives has become much more standardised. There’s a diversification aspect at play, especially when you think about most of the captives out there who have traditionally been funding lines such as workers’ compensation, general liability or property into their captives,” he said.
“By integrating stop-loss into captives, organisations can diversify their risk portfolios and leverage the financial stability of the captive to manage these rising costs more effectively.”
Cost control and risk diversification
One of the primary reasons for integrating stop-loss into captives is cost control. “People who have maybe been on a fully funded plan have outgrown it from employee growth and cost growth, and they are looking to move to a self-insured vehicle,” Scherer explained.
“By utilising a captive, organisations can take on more risk while financing it through the captive along with other lines of coverage. This approach helps in managing costs and offers a structured way to diversify risk.”
Lakhanpal emphasised the importance of diversification, stating: “We have clients, especially large captives, who are looking at basket aggregate programmes rather than thinking only about individual programmes.”
This strategy helps clients to spread the risk across various lines of coverage, reducing the financial impact of large claims on any single line.
Enhanced enterprise risk management
Integrating stop-loss into captives plays a crucial role in enhancing enterprise risk management. Scherer highlighted that organisations are now seeing value in looking across the human resources (HR) and risk management departments, which are usually segregated. This holistic view allows for better alignment of risk management strategies across the enterprise.
According to Lakhanpal, risk managers bring a level of due diligence to the employee benefit side, which has traditionally been limited.
“Risk managers have been talking about claims cost management and driving down claims for a very long time on the P&C lines of coverage. Conversations around controlling costs in the HR landscape have been somewhat limited to plan designs structuring.”
By integrating stop-loss into captives, organisations can apply risk management principles more effectively to their employee benefits programmes, driving down costs and improving overall financial performance.
“Looking at the integration collectively allows for more aggressive captive pricing and risk management.” TJ Scherer
Best practices for successful integration
Effective communication and collaboration between different stakeholders are essential for the successful integration of medical stop-loss and P&C in captives. Lakhanpal stressed the importance of communication, stating: “We’ve done a lot of programmes where we’ve started on the P&C side and created programmes on the medical side, and vice-versa. In both cases, communication among all stakeholders and teams is key.”
This involves ensuring that HR, risk management, and other relevant departments work together towards a common goal.
Leveraging data and actuarial insights
Utilising data and actuarial insights is crucial for managing the integration effectively. “Providing the data points rounds out how clients view risks and benefits in the short term and the long term, both prospectively and retrospectively,” Scherer said. This involves using feasibility studies, actuarial opinions, and financial reports to guide decision-making and track performance.
Strategic partner selection
Choosing the right partners is another important factor. Lakhanpal noted that captives should seek carriers who can view risk through a multi-year time horizon.
“Most captives want carriers who have the ability to think strategically from a partnership standpoint,” he said. This approach ensures that the captive has the support it needs to manage risks effectively over the long term.
Innovative strategies in stop-loss and P&C integration
Organisations are employing various innovative strategies to integrate stop-loss and P&C insurance within their captives. According to Lakhanpal, traditional stop-loss programmes are evolving, with new structures such as aggregate-only programmes or reimbursement models being leveraged.
Scherer added that looking at the integration collectively allows for more aggressive captive pricing and risk management. “You may feel more comfortable moving up to $350,000 or $500,000 retention because the captive collectively could absorb that loss layer in an adverse scenario,” he said. This approach changes the risk tolerance and allows for better financial planning and stability.
Managing perceptions and education
One of the challenges in integrating stop-loss and P&C in captives is managing perceptions and educating stakeholders. Scherer acknowledges that some risk managers might find the process daunting.
“It’s very important not to try and restructure or treat the integration of the medical stop-loss programme as something upending what the HR team has spent countless hours putting together. It’s a strategic plan that starts with baby steps,” he explained.
Creating a collaborative environment where HR and risk management departments can work together is crucial. Lakhanpal highlighted that risk managers who have been successful in partnering with HR stakeholders adopt a partnership mindset, saying: “Most of our clients are adding HR stakeholders to the board of directors for the captive, creating a more inclusive environment.”
Conclusions
The integration of medical stop-loss and P&C insurance into captives is a growing trend driven by the need for cost control, risk diversification, and enhanced enterprise risk management. By adopting best practices such as effective communication, leveraging data and actuarial insights, and strategic partner selection, organisations can successfully navigate this complex landscape.
This approach helps in managing costs and enhances the overall risk management framework, providing a robust solution for groups seeking to optimise their insurance strategies.
Prabal Lakhanpal is a senior vice president at Spring Consulting Group. He can be contacted at: prabal.lakhanpal@springgroup.com
TJ Scherer is a vice president at Spring Consulting Group. He can be contacted at: tj.scherer@springconsulting.com
Click here to read Captive International's US Focus 2024 publication.
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