Medical Stop Loss. Specific Stop Loss. Gateway to Self-Funding and the Use of Medical Stop-Loss Captives

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1 Gateway to Self-Funding and the Use of Medical Stop-Loss Captives Medical Stop Loss A form of insurance that employers purchase to limit their losses when self-funding their employee s health plan Two Forms: Specific Stop Loss Aggregate Stop Loss Specific Stop Loss Insures against a single catastrophic claim that exceeds a dollar limit the specific deductible Protects against large individual claims Claim must be paid within a specific period of time Specific deductible determined by size of employer or as percentage of the expected paid claim

2 Aggregate Stop Loss Insures against total claims exceeding an estimated dollar amount plus a margin during the plan year Limits total financial liability of the plan Margin is typically 110% to 125% of expected claims, depending on size of health plan Usually offered with Specific Stop Loss CICA Survey Results Medical Stop Loss through a Captive Allows employer to control more of the risk and cost of selfinsuring medical benefits: The captive provides a mechanism to spread the risk over a reasonable time period and across various entities or divisions Employer retains underwriting profit and almost all of the expenses that cost 25 to 40% of the premium Captive can structure reinsurance using the commercial market to protect it from catastrophic losses (or less than catastrophic losses)

3 Advantages of Using a Captive Cost Savings Losses can be higher than expected in any given year, but the overall cost will be less over a longer period of time Cash flow benefits from retaining premium dollars in the captive The captive has a lower cost structure Advantages of Using a Captive Risk Diversification If medical stop loss is placed into a captive covering property and casualty exposures, risk distribution can improve because stop loss exposure is unrelated to those other risks Having unrelated risks insured together can reduce overall funding Any excess reserves in the captive can serve as the required capital for the stop loss insurance Single Parent Structure 9 Status quo approach involved fully insured medical stop-loss attaching at $300,000 per individual. Captive structure involves unlimited protection above $300,000 per individual with captive net retention of $700,000 excess $300,000 with $2,000,000 aggregate.

4 Single Parent Structures Employer Stop Loss Group Captive Program 11 An Unsustainable Path: % 200% 150% 100% 50% 0% 0% 38% 57% 14% 72% 17% 128% Workers' Contribution to Premiums 180% 159% 196% 182% 109% 138% Health Insurance Premiums 29% 29% Workers' Earnings % 40% Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), ; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, (April to April).

5 Option A - Fully Insured Significant rate increases every year, with little or no meaningful data Are you supporting the market, or being supported by it? Where do the premium dollars go? Buying cycle isn t linked to true cost In 34 states, 70%+ market share controlled by 3 carriers Your available options: 1. Change carriers 2. Shift costs by changing benefits or contributions Option B Self-Funded Advantages of self-funding 1. Traditional Advantages Cash flow advantages; no pre-funding of claims Data transparency Multi-state plan design; flexibility; ease of administration Lower fixed costs Exempt from premium tax Retain carrier profit 2. Under ACA Not required to provide coverage with minimum essential benefits Not required to participate in a risk-adjustment system Not subject to provisions, such as Medical Loss Ratio requirements and premium increases Option B Self-Funded Challenges of Self-Funding for Midsize Companies Retaining risk Staying long-term focused Data overload Volatility and Lasering Resources to manage health risk initiatives Risk Retention Lower Expenses Health risk mgmt. Less insurance Stability Utilization Catastrophic Long-term plan 15

6 Option C Group Captive Group Captives bring it all together by allowing smaller employers to act like large employers: 1. Traditional advantages of self-funding 2. Additional advantages with ACA 3. Best practices for health risk management 4. Collaborative financial strength 5. Greater scale for predictability 6. Buy less stop loss insurance (higher attachment point) Ideal Employers Targets employees eligible for health benefits Forward-thinking management A culture of communication with employees on health care costs Willingness to implement robust health management initiatives Financial stability and willingness to take on a portion of the risk for their employee health plan Ideal Group Targets All employers >50 ees on each employer plan Broker/Agency Client Base (or Prospects) Group Purchasing Trusts/ Affinity /Buying Affiliations Industries Impacted By ACA Industries with Unique Demographics Industries with unique stop loss structures Hospitals with Domestic Reimbursements Unique health risk management strategies

7 Stop Loss Group Captive Marketplace Captive Brokers / Intermediaries Direct Writing Carriers fronting and retaining excess Direct Writing Carriers fronting, excess and seg-cell turnkey with reinsurance Direct Issuing Captives using Excess Carrier Employer Stop Loss Group Captive Program: Structure 20 Predictability and Probability SEVERITY SHARE TRANSFER RETAIN Self-Funded Retention (SFR) Group Retention Fixed Costs (Captive (Insurance) Layer) FREQUENCY

8 Stop Loss Policy Structure BERKLEY LIFE & HEALTH PER INDIVIDUAL MEMBER RETENTION Individual $25,000 per Individual Aggregate 110%-125% of expected claims FREQUENCY OF CLAIMS 22 Risk Layer Funding PER INDIVIDUAL EXPENSES GROUP CAPTIVE MEMBER RETENTION (SFR) Individual $25,000 per Individual Aggregate 110%-125% of expected claims Berkley Life & Health retained excess, expenses, TPA Up to $250k individual Premium funding Non-premium funding (collateral) FREQUENCY OF CLAIMS 23 Risk Layers: Claims exposure/costs Berkley Retained Layer Retained Excess + Captive Aggregate Coverage + Fixed Costs Group Captive Layer Premium + Non-Premium Funding (collateral) Risk assumed by Stop Loss insurer >$250k individual and captive max Risk shared among members in captive Employer 1 (SFR) Employer Layer Employer Employer Employer (SFR) (SFR) (SFR) Employer 5 (SFR) No risk sharing Employers pay for claims up to Stop Loss (Individual or Aggregate claims) 24

9 Relationship of Parties Employer* Captive Agreement Stop Loss Policy Captive Berkley Life & Health Reinsurance Agreement *Includes plan, broker, TPA, and risk management strategies 25 Costs, Results, and Financial Scenarios 26 Sample Results By Layer Collateral 5% Expenses 15% Captive Layer 25% Self- Funded Retention 70% 27

10 Sample Results By Layer Surplus at Captive Layer = No collateral draw Collateral 5% Expenses 15% CAPTIVE LAYER SURPLUS Captive Layer 25% Self- Funded Retention 70% Beating Expected Claims at SFR Past EmCap results are not a predictor of future results. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data shown. 28 Considerations and Potentials Cumulative impact of retention = Long Term Plan 1. Retain positive variability 2. Spread negative variability Increased risk tolerance with experience/data Surplus potential also = collateral carryover Pay yourself leveraged trend Increase captive risk layer with scale Leveraged Vendor Pricing and Collaboration 29