What have you seen in terms of recent developments in the self-funded healthcare market and how have they affected captives?
Although growth in the self-funded employee benefit healthcare market has stabilised over the past year or so, the use of captives for medical stop-loss continues to be one of the most active growth segments within the alternative risk industry. Large single-parent captives continue to add medical stop-loss, and group captive growth among mid-sized employers continues to be quite robust.
The most interesting market developments have actually been within the medical stop-loss market itself, which is undergoing a significant evolution. There is a very definitive trend of the big medical stop-loss writers getting bigger. In 2010, the medical stop-loss market was estimated to have been an $8 to $10 billion industry with 70 percent of that market being controlled by the top 25 writers of the coverage. The medical stop-loss industry is now estimated to be between $14 and $17 billion, with 70 percent of the market now being consolidated among the top 10 largest writers.
The growth in medical stop-loss market volume is commensurate with the growth in self-funding, but I find the consolidation in volume among a smaller group of carriers especially intriguing—but not surprising from a macroeconomic perspective.
What is driving the changing composition of the medical stop-loss market?
The healthcare environment is highly volatile and the medical stop-loss market extremely competitive—the stakes for writing profitable business have become much higher since the implementation of Affordable Care Act.
Over the past few years, I have maintained that medical stop-loss, even as a shot-tail line of business, increasingly needs to be written by carriers with (underwriting expertise and market experience notwithstanding) both the institutional strength and a medical stop-loss portfolio large enough to absorb the growing frequency of large losses, especially multi-million dollar individual claims.
There is a definitive migration away from smaller carriers and especially managing general underwriters (MGUs) by larger brokers. It doesn’t take much to envision what can happen to affect the operating stability of a $25 million or even a $50 million MGU, leveraged by its issuing carrier and reinsurers, after experiencing even a few multi-million dollar claims. Even though there have been some new MGU market entrants over the past few years, more have either been absorbed by or sold to carriers, effectively becoming blocks of assumed direct-written premium for the carrier. A few prominent carriers have also recently entered the medical stop-loss market, either from scratch or through the purchase of MGUs, but they have yet to stabilise significant positioning in this segment.
There has also been a trend of brokers forming preferred medical stop-loss carrier panels, which has further consolidated the amount of medical stop-loss business among larger carriers. Again, the larger writers will continue to accumulate market share and the smaller writers and especially MGUs will face increasing headwinds in remaining competitive.
Given the current market dynamics, what sort of savings can be expected for medical stop-loss premiums through a captive?
The real focus of a medical stop-loss captive should not be about reducing the pricing of the stop-loss coverage itself, although long-term stabilisation of stop-loss costs is one of the objectives. The captive only changes the way that the insured structures assumed segments of risk, including layers of stop-loss. The pricing of the actual risk does not change, it’s only the entity holding defined segments of the risk that changes.
The primary exception would be if the captive itself is able to issue the stop-loss policy, which is typical for a single-parent but more difficult for a group captive. If the captive is able to issue the policy, and purchase medical stop-loss in the form of reinsurance, as opposed to an excess insurance policy, some of the related policy expenses (such as fronting fees, collateralisation, and taxes) can be eliminated or reduced. That would be an instance for reducing the actual cost of the stop-loss.
The captive is really a mechanism to facilitate more efficient retention of self-funded risk. Formalising layers of retained risk into medical stop-loss coverage allows the captive owner to accumulate surplus that can then be deployed in different ways to reduce the employer’s overall cost of delivering healthcare benefits to employees.
Keep in mind that the focus really needs to be on what can be done to control and reduce the risk within the underlying benefit plan to generate greater loss-cost savings. Reference-based pricing, direct provider contracting, increased use of narrow networks and accountable care networks (ACOs) and domestic ‘medical tourism’ are examples of increasingly popular strategies being implemented by self-funded programmes to reduce healthcare charges. Even a change to a more appropriate provider network can yield significant loss cost-savings. As the captive achieves efficiency and reduces losses over time, the stop-loss costs will also stabilise if not actually be reduced.
Growth has been especially robust in group captives. What are some of the primary considerations for evaluating group captives?
There are two general types of group captives. The first is a tightly-controlled, ‘closed’ group of employers that form their own group captive. The second is an ‘open-market’ (typically heterogeneous industry composition) captive that is open to outside membership. With both structures, the basic carrier considerations are generally the same as they would be for a single (traditional) self-insurer selecting a medical stop-loss carrier.
The tightly-controlled ‘closed’ groups have fewer member-employers (with a higher average member size) and will typically work with a direct-writing (re)insurer to develop a customised ceded risk-sharing arrangement for specifically designated layers of risk. They usually require less in terms of programme service components and can have a more efficient expense structure. With fewer participants, active engagement among members is higher and each member has a greater level of persuasive influence in the directional control of the captive.
The more prevalent ‘open-market’ groups tend to be more prepackaged and operated by third-party programme administrators (PAs) or MGUs. It is important for a self-insured employer to understand that a PA does not have the same level of control that is provided by a direct-writing carrier. These entities will only have the level of authority that has been delegated from the issuing carrier. Any decisions outside of the PA’s designated authority level, in terms of underwriting, administrative and claims decisions, will ultimately come from the carrier and/or the carrier’s reinsurer.
This reduces the level of control to the captive and participating employers in terms of overall programme direction and management. The programme structure also adds additional expense which ultimately reduces the programme’s profitability on a net basis. In some cases, this is not a huge concern, but is something that needs to be considered.
From my perspective, expense transparency is a major consideration when evaluating PA managed group programmes. My strong recommendation is to avoid any programme that does not provide a detailed and unbundled disclosure of the gross-to-net expense structure with complete transparency. Typical fees include fronting fees, reinsurance, taxes, brokerage commissions, and PA management fees. The more fixed expenses charged to the programme, the less that is ultimately available to pay claims, be retained as surplus, and eventually returned to participants as profitability dividends. A discerning approach needs to be taken when evaluating programmes, especially with regard to expense structures approaching the mid 30 percent-plus, range which is pretty common.
Other evaluation considerations should include:
Where do you think the medical stop-loss captive market is headed?
I’m quite bullish on continued expansion. Given the level of interest and consistent growth—even in very soft medical stop-loss market conditions—I can only envision sustained growth for both single-parents and groups. Regulatory and healthcare economic uncertainty will also continue to drive self-funded healthcare and increase the use of captives for medical stop-loss.