By Sue Wakamoto, Leavitt Group
In the property and casualty insurance world, the concept of “captives” is well-known. While business owners have used captives to insure a particular risk, rarely has a captive been leveraged for employee benefits — though that is about to change.
In the past, businesses would often go to their industry association for a competitive employee benefits plan. However, these plans may not be a viable solution moving forward—especially for the larger employer participants. Multiple Employer Welfare Arrangements (MEWAs) were one vehicle through which association members—particularly small employers—could find reasonable benefits coverage for their employees. However, because of issues ranging from fraud to insolvency, MEWAs have seen their regulations tightened, often resulting in less competitive rates.
The Affordable Care Act adds another element of uncertainty to association plans. Small employers who qualify for the state and federal exchanges may depart from association plans altogether—deserting the larger, mid-size employers who may not qualify for the exchanges. Further, if these mid-sized employers face ongoing medical conditions, and especially if they do not qualify for guarantee issue, they may be left with no employee benefits solution at all.
So what options are there for these mid-size employers who are currently in an association plan? This is where benefits captives come into play. Benefits captives are a viable alternative for mid-size employers and are gaining in popularity due to the ACA and the regulations around MEWAs. Already, benefits captives have been formed for a number of industries, including hospitals, construction, municipalities, and non-profits, just to name a few.
What’s the catch?
The captives reserve the right to screen the employer for suitability even before the underwriting process. Not every employer can stomach being in a captive. It requires a full understanding of how the process works and a commitment to participate long term to establish credibility and reduce the volatility of the pool. However, the return on investment can make the effort worthwhile.
Essentially, the employer is self-insuring for the smaller claims while paying into the captive to cover the medium-sized claims. The contracted insurance company covers catastrophic claims that exceed an annual cap. Cost savings can be experienced as an employer encourages good employee health “behavior,” as claims stay below established thresholds, and through strategic benefits plan designs.
How is participating in a captive different from being self-insured or alternate-funded on a stand-alone basis?
While many insurance companies are offering some form of self-insurance to smaller employers, captives are unique in that they are generally industry-specific, acknowledging the unique challenges and needs that an employer may face within their particular industry. In addition, captives tend to have much more favorable pricing for the fixed costs and claim projections with better overall flexibility than
traditional carriers. The captive population, being part of a larger group with leverage, is able to secure better pricing than a direct single employer contract with a carrier.
How will an employer know if a captive is an appropriate option for them?
This is where a knowledgeable and innovative benefits consultant can demonstrate his or her worth. While captives are not the answer for every mid-sized employer out there, they can be an ideal solution for the employer who is frustrated with the current options and industry landscape and is ready to explore creative financial solutions and gain control over the ever-increasing cost of employee benefits.
For employers with 50 or more employees and who are currently in an association plan, now would be the time to explore the continued viability of that association’s plan. Even employers who are not in an association plan need to be aware of the options available to them. Waiting to see what happens a year from now as the exchanges beckon small employers to enroll may be too late.