The Basics of Self Funding

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1 April 21, s0814 Edt

2 Daniel R. Meylan Insurance Professional Since 1973 P&C and Benefits Broker Agency Owner Agency Senior Executive Agency Acquisitions and Valuations Self Insurance, Captives, RRGs Bank Agency Operations Husband, Father, Grandfather

3 Key Questions What is self funding? When should self funding be considered? Principles of self funding. Who uses self funding? What type of risks can be self funded? What is the operational structure of a self-funded program? What are the types of self-funded programs? What are the costs associated with a self-funded plan? What is the process of setting up a self-funded plan? Small Group level funded health plan. Sample Cases Successes & Failures

4 The foundation of self funding: Self funding or self insurance is ultimately a function of claims costs and the predictability of and control over claims activity.

5 What is self funding? Self funding is accepting the risk of loss as part of the operational expenses of the enterprise and limiting the ultimate exposure to the enterprise by purchasing some form of excess insurance.

6 Who engages in self funding? Most enterprises with 500 or more full-time employees utilize self funding as part of their risk management strategy.

7 Self funding requires: Cash Claims Data Management Involvement Some Level of Insurance Protection

8 Why self funding? Less expensive improves profits More control of costs Manages unique risks

9 Self funding structure: Working layer claims paid from the revenues and cash flows of the enterprise Excess Layers Stop Loss or Reinsurance purchased to protect against catastrophic loss exposure Excess Layers Working Layer Excess Layers

10 Self funding terminology: Loss Fund claims paid from cash flows of the enterprise Specific Stop Loss insurance protection against singular catastrophic events severity exposure Aggregate Stop Loss insurance protection against the cumulative effect of numerous claims frequency Specific Stop Loss Loss Fund Cash Flow Aggregate Stop Loss

11 Risks that can be self funded: Workers Compensation General Liability Professional Liability Product Liability Group Health Insurance Auto Liability Environmental Liability

12 Who is a candidate for self funding? When the cost of transferring risk (buying insurance) exceeds the cost of self insurance it is time to self fund.

13 Conducting a self funding feasibility analysis: 1. Analyze accurate loss data (3-5 years currently valued) 2. Evaluate the company s financial resources 3. Select a self funded structure 4. Determine the cost-appropriate reinsurance 5. Determine the cost and structure of a claims administrator 6. Determine the structure and cost of safety and loss control 7. Determine regulatory approval cost and process if required 8. Evaluate final cost against other risk transfer alternatives

14 Types of self-funded plans: Risk Purchasing Group - RPG Risk Retention Group RRG Retrospectively rated plan Rent-a-captive Wholly owned captive Self Funded WC Program Self Funded Group Health Program Level Funded Plans MEWA Multi Employer Welfare Arrangement

15 Financial components of a self funded program (100 pennies in a $1.00) Policy fees Premium taxes Reinsurance Loss control services Marketing costs Claims administration Claims costs Investment income Collateral costs Underwriting profit or (loss)

16 10 financial components of a self-funded program Policy fees The cost to underwrite issue and administer the policies including endorsements and billings. Premium Taxes Taxes and fees due federal, state and local regulatory authorities and regulatory compliance costs. Reinsurance Coverage purchased from other insurance carriers to defray catastrophic risk exposures. Underwriting and Loss control services Safety training, premises inspections, on site risk evaluation, analysis of claims activity to predict and prevent future losses. Marketing Costs Fees and commissions paid to the distribution system, licensed agents, brokers and carriers. Claims administration The cost of servicing and managing claims activities including tracking and analyzing of claims history. Claims Costs The actual ultimate cost of all claims including litigation and allocated loss adjustment expense. Investment Income Interest earned on funds in excess of expenses and paid claims. Collateral costs Costs associated with letters of credit or other financial guarantees. Underwriting profit or (loss) (Premiums Paid + Investment Income) (Fixed costs + claims and related expenses) = profit or (loss).

17 aka Level Funding Level Funded Small Group Health Plans 1. An alternative to the ACA cost increases 2. Lower costs for groups with favorable claims experience 3. Claims history determines final costs 4. Maximum employer liability is fixed 5. Turn-key level-funded plans available for groups with 2 or more covered lives

18 What is the difference between self funding and level funding? Self Funding the employers ultimate costs are variable and unknown and based entirely on the cost of claims typical for employers with 100 FTES or more Level Funding the employers ultimate costs are capped and limited to a specified dollar amount Typical Level Funded Plans are limited to 12 monthly payments available for groups as small as 2 lives 18

19 Why Level Funding for small employers Long Term it s the most cost effective way to finance a group health plan Reduces insurance company profit Eliminates state insurance premium taxes Eliminates state benefit mandates Allows employer to take control of group benefit plan Money not spent on claims belongs to the employer not the insurance company May avoid the negative rate impact of ACA 19

20 Self Insured WC Case Study Success Story Client: Retail Grocers Association 750 retail stores in 5 states Type of Program: Wholly Owned Captive Total Payroll: $225M Standard Premium: $ 19M Per Store Premium $ 25,500 Premium Rate 8.5% of payroll Premiums Paid $7,344,000 Specific Stop Loss: $250,000 per claim Aggregate Stop Loss: 94% of standard premium Total Incurred Losses: $3,071,000 Policy Fees $ 144,000 (1.96%) Premium Taxes $ 220,320 (3.00%) Reinsurance $ 807,840 (11.00%) Loss Control $ 367,200 (5.00%) Marketing $ 551,625 (7.51%) Claims Admin. $ 388,511 (5.29%) Incurred Losses $ 3,071,000 (41.82%) Investment Income ($ 680,000) (+9.25%) 72 months Collateral costs $ 25,000 (0.3%) Total Program Costs $ 4,895,496 (66.66%) Underwriting Profit $ 2,448,504 (33.34%) Net Savings per store $ 8,502

21 Self Insured WC Case Study Unsuccessful Story Client: Private Security Firm 1600 employees in 12 states Type of Program: Rent-a-Captive Total Payroll: $44,000,000 Premium Paid: $ 7,040,000 Premium Rate $16.02 per $100 of payroll Specific Stop Loss: $500,000 per claim Aggregate Stop Loss: 140% of standard premium Total Losses: 335 Total Incurred Losses: $6,794,000 Program Costs: Policy Fees $ 125,000 (1.96%) Premium Taxes $ 422,000 (6.00%) Reinsurance $ 1,267,000 (16.00%) Loss Control $ 281,600 (4.00%) Marketing $ 352,000 (5.00%) Claims Admin. $ 440,300 (6.25%) Incurred Losses $ 6,794,000 (96.50%) within retention Investment Income ($ Collateral costs $ 113,000 (1.6%) Total Program Costs $ 9,476,900 (134.62%) 318,000) (+4.51%) 72 months Underwriting Loss $ (2,448,504) (34.62%) Final Rate Per $100 of payroll $21.54 per $100 of payroll

22 Group Self Funded Arrangements MEWA Multi Employers Welfare Arrangements A MEWA is a self funded arrangement that allows multiple small employers to band together to form a group self funded arrangement that shares risk across multiple small employers. MEWA s are only allowed in 6 states. Iowa is not one of them

23 MEWA Multi Employers Welfare Arrangements Key MEWA features: Each employer s employees are medically underwritten Program is not guaranty issue The MEWA may discriminate by charging higher rates to less healthy groups and declining unhealthy groups MEWA s are subject to Insurance Dept regulatory oversight MEWA s are ERISA compliant MEWA s are permissible as an alternative to ACA in some states

24 Final Observations on Self funding Self funding is always a risk management alternative Self funding is not always prudent Self funding requires active management involvement Self funding assumes predictable claims experience Self funding usually includes risk transfer through insurance at some level Self funding ultimately reduces long term risk management costs

25 Thank you! Question & Answer Session More questions? Contact Dan Meylan

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