Employee Benefits Captives – A Self-Insurance Alternative for 51 to 500 Employees

In the not too distant past, only companies with thousands of employees and lots of liquidity could afford to self insure their employee benefits. Small to medium sized employers are in a difficult situation because they have few options and very little information on the healthcare system. They don’t know what claims they have or what their premium dollars go towards.

The inherent lack of transparency in the system prevents employers from controlling the cost of health insurance.  The only thing that is clear is the annual increases they experience each year.  As fully insured employers have experienced double-digit increases year after year, small and mid-sized companies have been looking for ways to mitigate these increases and take control of their healthcare spend.

Now, companies with as few as 51 employees find they can come together with similar sized companies to get many of the same benefits and savings of self insured programs, without the volatility of a high deductible stop loss policy. One of the most effective ways for these smaller companies to purchase this stop loss coverage is through an employee benefits “captive.”

What Is An Employee Benefits Captive?

Similar to traditional stop loss insurance, an employee benefits captive protects companies from catastrophic loss through individual stop loss and aggregate stop loss. In the traditional stop loss markets, the smaller a group is, the more subject to claims volatility it becomes. Through an employee benefits captive, employers have the purchasing power of a company with thousands of employees. However, these captives differ greatly from Trusts or other “pooled” products because an employer receives individualized risk and renewals based on their unique claims performance.

Similar to other types of captives (worker’s compensation, auto liability, etc) the employee benefits captive is owned or controlled by the participating companies. By collectively funding this shared layer of risk, these employer groups participate together to reduce the cost of their financial risk. Companies share in the claims performance (“skin in the game”), allowing mid-market employers to purchase stop-loss, which is more affordable and more stable.

Why Our Clients Like Captives

Parker, Smith & Feek, with 180 employees, has been self insured for years. We have helped dozens of clients make the shift. As evangelists of self insurance for companies (where it makes sense), we have mapped some of the benefits that are realized by joining a captive:

•  Lower cost – Through the purchasing power of thousands of employees, instead of hundreds or dozens, employer groups typically see a much greater financial advantage through employee benefits captives than they would on the open stop loss market.
• More transparency & control – Because each employer gets real time data on their healthcare spend, they can focus and take action to truly control the actual cost drivers.
•  Refunds – Refunds do not exist in fully insured benefits plans. However, all employers within a captive program share in the economic results and potentially receive a distribution based on the overall performance/results of the “shared layer” of risk.
•  More stable renewals – Many employers with traditional benefits programs have—at times–experienced wide swings in their premiums and benefit options at renewal time. These swings are far more manageable as a member of an employee benefits captive with other companies contributing to its stability.

Self Insurance Is Not For Everyone, But It’s Worth Looking Into

The true value of a captive and self insurance is the transparency, control, stability and profit potential, which are inherent in these programs. These tools help employers gain more control over their healthcare spend and reduce costs.

One of the biggest parts of being self insured is taking a close look at the culture of your company. The size of the company, benefits usage, average staff age, number of dependants, claims history (or lack of claims history), type of business (typical claims for your industry), and the needs of the staff are all factors that contribute to your employee benefits costs. Even if a company finds that a captive makes sense monetarily, they may decide it doesn’t fit culturally. Based on our company’s experience, and that of our self-insured clients, we can provide knowledge to help you make an informed decision.

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