Intro to Self-Funding
An Introduction to Captive Insurance
A method for protecting self-funded health plans against large claims, captive insurance is a risk management solution that represents another alternative to traditional, fully inured plans. Simply put, captives are organized as independent insurance companies that are managed – either directly or indirectly – by the business or group of businesses they insure.
Captives are set up to manage many different types of risk, but they have become much more widely used for employee benefits in recent years as the costs related to health coverage continue to trend upward.
How Are Captives Organized?
When an organization decides to offer employee benefit reinsurance through a captive insurance structure, the parent company evaluates and identifies the risks of the subsidiaries it will underwrite. This captive insurance company sets and pays the premiums within the program and is able to invest any profits.
Pricing is based on the loss experience of the companies that have bought into the captive – often similar in size or industry – versus a broader population. Captives can be set up as standalone entities or as part of a larger group. When used for employee benefits, their structure is based on a number of factors, including industry, assets, number of employees and geographic location. Some captives are domiciled in the United States while others operate from international locations.
What Are the Benefits of Joining a Captive?
Captive insurance can give companies more control, flexibility and stability in the coverage they offer employees. Lower costs and improved plan management are also significant objectives. Some of the main advantages of using captives to manage employee benefit risk include:
- Customized coverage/risk management tailored to a specific population
- Added flexibility in managing/financing risk
- Population health management and wellness programs are often included as part of the program
- Cost savings – reduced operating costs and increased cash flow; investment income through savings on premiums that stay with the group vs. being paid to a carrier/outside party
- A hassle-free transition for employees and lower rates on their premiums, deductibles, co-pays and prescription costs
- More control in the management/administration of health claims
- Direct access to the reinsurance market
- Potential return on a portion of the reinsurance premium
- Participation in a program alongside other like-minded employers that are working to contain costs and reduce risk within their health plans
What Types of Captives Exist?
There are several types of captive insurance available today. Common structures include:
- Single-Parent Captive – Also known as pure or wholly owned captives, this structure provides insurance to cover the losses of its parent company. With single-parent captives, insurance coverage remains solely within the organization except for any reinsurance purchased.
- Group Captive – Commonly used with employee benefits, this is captive insurance that’s owned by multiple parent companies. These captives may target employers within a single industry or geographic footprint – or they may accept many industry types. Group captives allow companies to pool their risks and claims experiences collectively.
- Association Captive – This structure is similar to a group captive but sponsored or owned by an association (trade group, industry group, etc.).
- Rent-a-Captive – Just as the name implies, these captives are owned by one organization, but used or “rented” by another third party for a set fee. The company renting typically does not want to take on the management/ownership of a captive itself.
Who Do Captives Work For?
There are thousands of captives set up worldwide in a variety of structures. This type of insurance is used by employers in many industries, including health care, financial, business/professional, manufacturing, technology and transportation.
The captive structure can work well for companies that are looking for a long-term insurance solution to manage the risk of employee benefits and have financial stability as well as a favorable loss history. Captive insurance can also work for businesses that follow a more hands-on approach to their health benefit plans.
Companies that are considering a move to captive insurance should complete a full feasibility study to weigh the pros and cons. This should include taking a careful look at their health claims trend data and analyzing their risk as well as their underwriting plan. A third party administrator (TPA) can also help employers evaluate if captive insurance would be a good fit.