As employers increasingly seek out methods to control costs without sacrificing benefits, stop loss coverage has emerged as a useful tool. It protects the self-funded employer from having to pay out-of-pocket for employees’ catastrophic claims. One of the ways to secure stop loss coverage is via a stop loss captive. Choosing this type of insurance structure, as opposed to buying stop loss from a commercial insurer, adds another layer of risk protection that could potentially lead to significant savings for your company.
Self-funding is no longer a fringe approach to providing employee benefits. Sixty-one percent of workers covered by an employer’s insurance are enrolled in plans that are at least partially, if not entirely, self-funded, according to the Kaiser Family Foundation’s 2018 Employer Health Benefits Survey. Stop loss captives are an essential consideration for self-funded organizations.
How a Stop Loss Captive Works
First, it’s important to understand how a stop loss captive works. A captive is essentially an insurance company that’s a subsidiary of another company or companies. In a single-parent captive, one entity owns the captive. Group captives have many members who are collective owners. In the stop loss space, captives provide a way for like-minded, self-funded employers to come together to get stop loss coverage while minimizing insurance risks for all of them.
Sometimes captives are formed within a specific industry. Other captives are heterogeneous, meaning they’re made up of companies from different industries. Typically this solution is used by medium-sized employers with anywhere from 50 to 200 employees.
While a captive may include dozens of members, each member maintains its own self-funded benefits and its own unique stop loss policy. Think of it a little like different classrooms in a school. All classes are part of the same school and governed by some of the same rules, but each of the teachers has autonomy to create policies and rules for their own classrooms.
Each captive member sets its own deductible, the dollar amount that the insured employer must pay before the insurer will contribute. The attachment point is the dollar figure above which the insurer starts paying.
In a traditional stop loss arrangement, there are two layers of risk. Say a self-funded employer has a specific deductible of $100,000, and one employee has a $250,000 claim. The employer pays any claims below $100,000, while the stop loss carrier bear the risk for any claims above the employer’s attachment point – in this case, $150,000.
In a stop loss captive, there’s a third layer between the employer and the carrier. A portion of members’ premiums fund this captive layer, which functions like a communal pool and is available to the entire captive. If the employer in the above example was part of a stop loss captive, the employer would pay the first $100,000, the captive layer might pay another $100,000 and the stop loss carrier would pay the last $50,000.
That’s just one possible breakdown, though; stop loss captives are very complicated, and because each member maintains its own policy, how risk and costs are shared varies from employer to employer and from captive to captive.
Saving Money with Stop Loss Captives
As a self-insured employer, the purpose of having stop loss coverage is to minimize your risk if one or more employees incurs catastrophic claims. With stop loss, you’ll only be required to pay a predetermined amount per employee, with the stop loss carrier covering excess claims. Saving money is the goal of this type of protection.
Participating in a stop loss captive won’t be a money-saving strategy for every business, and claims will still be incurred at the same rate and cost regardless of how you choose to put your stop loss coverage in place. But for employers who are good candidates for stop loss captives, taking this option could save money in a few ways.
For one, captives cut out the middlemen. Commercial insurers charge fees that captive members avoid. Captives have their own fees, so this alone might not trigger a significant savings. However,when claims come in at or below the expected levels, profits that the captive collects are returned to members. This is one of the major benefits of a stop loss captive.
Conversely, when claims exceed expected levels, captive members aren’t made to cover the losses. As with traditional stop loss arrangements, claims above the employer’s deductible are paid by the stop loss carrier. In this way, captives aren’t any more inherently risky than traditional stop loss arrangements.
Determining whether a stop loss captive makes financial sense for your business isn’t something you have to figure out alone. At Stop Loss Insurance Brokers, helping employers find the solutions for their insurance needs is what we do best. Contact Stop Loss Insurance Brokers today to discuss your options.