Employee Benefits and Healthcare – Current Captive Impacts Presented by: Moderator: Anne Marie Towle, CPA, VP & Senior Consultant, Willis Troy Filipek,

Employee Benefits and Healthcare – Current Captive Impacts

Presented by:

Moderator: Anne Marie Towle, CPA, VP & Senior Consultant, Willis

Troy Filipek, FSA, MAAA – Principal and Consulting Actuary, MillimanMark Smidt – Director, EBMS ReKyle Plath – Senior VP, Trean Re

Wednesday, September 28 1:30 – 2:45 pm

Agenda• Healthcare Captives – Why and how?• Impact of Healthcare Reform (PPACA)• Case Study – EBMS and Trean Re• Discussion and Questions

Healthcare Captives• Why Captives for Healthcare? Similar as for other

lines of business . . .– Reduced insurance expenses

– Possible tax efficiencies

– Cash flow management

– More efficient use of capital (i.e., float)

– Ability to develop custom insurance programs – more flexible than commercial market

Healthcare Captives

• But healthcare is also different . . .– Short term vs long tail expenses

– Generally predictable claim patterns

– Uncorrelated exposures relative to traditional risks held in captives

– PPACA pressures

Healthcare Funding• Three types of funding mechanisms traditionally

– Fully insured – All risk transferred through premiums

– Self insured – All risk retained; use health plan to access network and pay claims

– Hybrid – Self insure with stop loss (aggregate and/or specific) to transfer catastrophic risk

• Stop Loss– Specific – Per person catastrophic

– Aggregate – Total employer costs

Option 1: Jumbo Employers

• Works for sponsors with > 10,000 ees• Huge advantage to already have a captive in place that

insures other uncorrelated risks

• Option 1a - Medical stop loss coverage only – Generally includes steep risk margin in commercial market– More later in case study

• Option 1b – Reinsure ERISA benefits (e.g., group life, disability, AD&D)– Employer acts as reinsurer and needs Prohibited Transaction Exemption (PTE)– Administrative and regulatory requirements big

• Results– Lower costs for same protection– More premium and spread of risk in captive

Option 1: Jumbo Employers

• Administrative and Regulatory Issues– DOL must approve PTE under Option 1b since ERISA prohibits

economic gains from providing benefits• Need A-rated fronting insurer per DOL• Need competitive rates and year 1 benefit enhancement

– Capital and surplus requirements

– Need competencies in running captive

– Beware NAIC tightening of stop loss model law – Forces employers of all sizes to retain larger portion of risk

Option 1: Jumbo Employers

• PTE Process (Option 1b)– Conduct feasibility study (cost/benefit analysis)

– Get help fast• Captive manager• Attorneys• Independent fiduciary – Opine on PTE compliance

– US branch approval – domiciled jurisdiction if not a US captive

– Negotiate contract with A rated fronting insurance company

– File for PTE with the DOL and implement plan

Option 2: Smaller Employers

• See some sponsors with < 100 ees push to self funding under PPACA

• Pool together risks across employers

• Hybrid funding noted earlier – stop loss through captive

• Historically, RRGs used to get around state licensure requirements, but state lawsuits slowed this trend

• Employer specific self funded plan, attachment point, pricing, etc.

• Results– Lower costs than fully insured– Lower costs than commercial stop loss

PPACA Influence• PPACA – Health Insurance Reform

• Costs continue to rise and many fear PPACA makes it worse

• New issues and concerns– No annual or lifetime benefit maximums– New mandates (e.g., $0 preventive with expanding definition)– New entities – Exchanges, Co-ops, Accountable Care Organization, etc.– New regulations (e.g., no medical underwriting, minimum loss ratios) and

fees (e.g., insurer fees)

PPACA Influence• Employers - Much more interest in self-insuring to:

– Avoid community rating for groups with better than average risks

– Avoid fees imposed on fully insured plans

– Avoid benefit mandates

– Take advantage of new offerings from savvy brokers and carriers

PPACA Influence• Other entities

– Provider groups / ACOs: Historical management of financial risk did not go well, consider other options with financial risk coming back

– Co-ops: Not for profits established to compete with insurers, likely will need help with risk management / transfer / funding

Using Captives to Smooth Out Medical Stop-Loss Insurance ExpenseUsing Captives to Smooth Out Medical Stop-Loss Insurance

Expense

Mark Smidt – Director of EBMS Re

Kyle Plath – Senior VP of Trean Re

Time-Frame EBMS Entered the Stop-loss

Arena – 1999-2000

• Significant Cost Adjustments from Stop-loss Insurance Markets– Stop-loss Carrier’s Actions to Correct Soft-Pricing Included:

• Lasers• Steep Renewal Increases• Non-Renewals

Objectives of EBMS’ Captive Program• Stabilize Stop-loss Insurance cost through:

– Eliminating lasering and non-renewals– Pooling the risk

• Renewals based on actuarial models, not individual experience rating = effectively eliminating spikes

– Profit sharing – achieved thru renewal discounts (Premium Discounts)– Create efficiencies by eliminating duplications of efforts– Specific Reimbursement turnaround times – reimbursement authority– Renewals able to be “locked-in” based on 10 months of experience– Create a “partnership” atmosphere for clients – Annual “Advisory Meeting” – Access to underwriting staff

Captive’s Risk Layer

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

“Leverage Trend” offset at the Captive’s risk layer 2002 = 150k multiplied by 10.5% (8) = 368k

Current Specific Risk Assignment

Plan Sponsor's Risk Layer = Spec Deductible/SIR

EBMS Re’s Risk Layer - First $300K above SIR

XS Reinsurance Risk Layer - Up to $1million xs of EBMS Re’s Retention

XS Reinsurance $1M xs $1M

XS Reinsurance $3M xs $2M

XS Reinsurance $5M xs $5M

XS Reinsurance $10M xs $10M

XS Reinsurance $Unlimited xs $20M

Gross Premium by Underwriting Year (Millions)

2002 2003 2004 2005 2006 2007 2008 2009 2010*$0.00

$2,000,000.00

$4,000,000.00

$6,000,000.00

$8,000,000.00

$10,000,000.00

$12,000,000.00

$14,000,000.00

$2,918,674.10

$4,336,464.50

$5,792,155.91

$8,375,347.76

$9,734,592.04

$11,529,388.02$11,437,958.00$11,393,293.00$12,057,745.00

ESTIMATED

Average Specific Deductible by UY(Weighted by Employee Lives)

2002 2003 2004 2005 2006 2007 2008 2009 2010 $-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Premium Credit Triangle – Block

Calendar Year:

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Client’s % of Total Prem

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

UY 2002: Maturity Period 30% 15% 15% 15% 5% 20% Final Adjustment

    UY 2003:

Maturity Period 30% 15% 15% 15% 5% 20% Final

Adjustment

        UY 2004: Maturity Period 30% 15% 15% 15% 5% 20%

            UY 2005: Maturity Period 30% 15% 15% 15% 5%

                UY 2006: Maturity Period 30% 15% 15% 15%

                    UY 2007: Maturity Period  30%  15% 15%

                        UY 2008: Maturity Period 30% 15%

UY 2009: Maturity Period 30%

2002 to 2009 Combined Allocation of Income(Inception to Date)

Program Flow Chart

Benefit Plan

EBMSStop-Loss Administrator

EBMS Re EBMS Captive (Reinsurer)

Issuing CarrierStop-Loss Carrier

Excess- Loss Reinsurer

Net Results

“Pooled”

Stop Loss Policy

AdministrationAgreement

Quota ShareReinsurance

Contract

Premium Discounts

Excess of LossReinsurance

Contract

Considerations in Forming a Captive

• Domicile – EBMS originally selected Cayman Islands and redomesticated

to Montana

• Captive Structure – EBMS originally formed as a single cell captive and has

transitioned to a segregated cell structure in Montana

Considerations in Forming a Captive

• Capitalization and Ownership– EBMS chose to fund the start-up capital and maintain 100%

ownership of the captive

• Risk Structure– EBMS purchased Specific Excess Reinsurance from the

inception of the program, increasing its retention as the premium volume has grown

EBMS Re’s StructureIssuing Carrier

– Excess Loss Carrier (or Issuing Carrier) on the program– Has given the Captive the authority to underwrite and issue stop-loss

policies in their behalf– Maintains the necessary ratings and licensures for the captive to operate. – Contracting body for the program’s reinsurance carriers & ensures the

financial integrity of the entire program

EBMS Captive– Quota Share reinsurance company on the program as well as the

underwriting body

Professional Reinsurer– Provides Excess Loss reinsurance coverage for the program

…cont.

EBMS Re’s Structure

Trean Reinsurance Services

– Program’s Reinsurance Intermediary. Facilitates the “marriage” of all the carriers and reinsurers associated with the program

EBMS

– Staffing support in: underwriting, policy issuance, administrative support, claim auditing, management, marketing

– Capital Investment

Questions???