Captives are a bit of a rarity in the employee benefits insurance field. They are heavily utilized in the Property and Liability Insurance industry to spread risk among several parties.
However, in certain cases, captives make sense for employee benefit plans. Traditionally, they are used by very, very large employers and mostly for ancillary lines of coverage such as life and disability insurance. What is often overlooked, however, is the application of captives to specific stop loss coverage for partially self-funded plans.
Partially self-funded plans are medical plans where an employer self-funds the claims up to a specific limit. For example, for a plan with a $250,000 specific deductible, all individual claims exceeding $250,000 are covered. Hence the term “partially self-funded.”
The stand-alone specific stop loss insurance policy is ordinarily purchased from a regular insurance company like Sun Life or Guardian. However, there are established captives that insure the specific stop loss. In that case, a pool of employers establish a captive unit. They share in the cost of the captive, and claims are paid out of the pool. If the claims are better than projected, the employer members receive a dividend or reimbursement at the end of the policy year. If the claims are worse than expected, the employers must pay to cover the additional claims and expenses.
Why would an employer participate in a medical stop loss captive? Of course, the answer is to save money. But how can a captive do a better job than an insurance company? The participating employers agree to follow a very strict cost management and risk management regimen. They would agree to a mandated wellness program, they would have eligibility audits, their Rx plans would be tightly managed, there would be claims audits conducted, and more. Certainly if they adhere to managing their claims they will be successful in reducing their claims cost. If managed effectively, captives can be a significant tool in controlling costs and managing unexpected losses.
