A stop loss group captive can offer many benefits:
- Costs based on claim results
Some companies have favorable and highly credible medical claim experience. Self-funding allows those companies to retain the results of claim experience (both favorable and unfavorable), with the expectation that the total cost of employee health care will be lower over the long-term. Of course, there is never a guarantee that costs will be lower, especially in a short time horizon.
- Lower risk charge
Another possible source of savings is the reduction of the risk charge vs. traditional fully insured plans. Risks charges include a profit margin for the insurer and a cushion in case the risk has not been evaluated properly.
- Investment returns
Another potential source of savings is in the retention of claim reserves by the captive, rather than the insurer. When a commercial insurer sets rates for insurance coverage, it makes assumptions about the interest rate earned on money set aside to pay future claims (reserves). The interest assumption is usually a conservative guess. If rates end up higher, the insurer can keep the difference. However, in a captive program, any potential savings may be retained.
- Lower volatility
When an organization self-funds alone, there can be considerable claim volatility from year to year, making it difficult to budget. However, when risk is shared through a group captive, the risk pool becomes larger and lowers the overall volatility.
Self-funding provides access to more claim data than is typically available with a fully insured plan. This is a key benefit, because companies must know where their health care dollars are going before they can try to manage them.
Self-funded companies in a group captive do not sacrifice control over their plan design, service vendors, or stop loss coverage. They also can be freed from many regulations that can drive up costs.
Along with potential benefits, there are potential risks to captives, including increased liability. For some companies, a group captive may be a stepping stone to forming a wholly owned captive. No one program is right for every company. Always ask your adviser before entering into a legal agreement.