If you’ve ever explored self-funded health plans, you may have heard of “captives”, but you might not fully understand how they function or what they do. To help shed some light on this topic, TCHP founder Mike Hill highlights the benefits and risks of a captive, as well as how to determine if a captive is right for your organization.
What Is A Captive?
The International Risk Management Institute (IRMI) gives us a good starting definition of “an insurance company that is wholly owned and controlled by its insureds; its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits.”
Often, this looks like a group of like-minded employers coming together to form their own insurance company that helps protect these organizations from being devastated by really large claims. The formation of a captive allows employers to control how their plan operates and collect the profits that typical insurance companies would usually take for themselves. Captives may also shield a company from risks beyond what traditional commercial insurance typically would cover.
Does A Captive Make Sense For My Company?
Many employers seek to establish captives after years of becoming frustrated with the standard insurance model – paying premiums to carriers without seeing any reimbursements for catastrophic claims. This can lead a company’s leadership team to begin exploring other options as they pursue opportunities to see the fruit of the benefits they’ve been paying for.
While captives certainly have their advantages, they’re not necessarily a good fit for every company. As Mike states in the video, we see captives as a great tool that can help smaller employers afford stop-loss insurance as they move towards a self-funded model. However, it is important to note that captives are not the end-all, be-all solution to every healthcare challenge your organization may face. Instead, captives have the potential to benefit employers when working together with other elements of a smoothly running plan.
How Can I Use My Surplus?
After a captive is established, the employers who formed the captive are able to use the surplus dollars from the plan to benefit their plan participants.
There are two common ways to use this surplus:
- The members can reduce everyone’s premiums, so all participants pay less than they would if they went to the open market.
- The members can return these dollars as a dividend to their shareholders at the end of the year if the plan ran well.
Either way, these employers benefit. If their plan performs well, these companies are no longer in the annual trap of “making a donation” to anyone other than themselves and the other partners in the captive.
Things To Consider
When considering if a captive is a good option for your company’s health plan, there are a few things to ask yourself:
1. How big is the captive?
If the captive itself is too big and accepts anyone, you likely won’t see the benefits in the same way that you would from a well managed plan. If it’s too small, it may still carry too much risk depending on claims.
2. How is the captive structured?
Thinking back to the previous section on surplus: Does the captive price the premiums lower than the market in order to return the surplus premiums? Or do they give the employers a dividend at the end of the year?
3. What is the captive’s model?
Captives can be set up in a few ways. Some captives use an “all for one, one for all” model, where member performance doesn’t matter nearly as much as the overall performance of the plan as a whole for all members. Premiums for upcoming years are determined by the entire captive’s performance, instead of having a specific company’s experience be held against them. Other captives are set up the opposite way, where individual companies will see their plans impacted by their performance the previous year.
Both of these models have their pros and cons, and the “right” model for each company will vary based on your organization’s risk tolerance.
As you contemplate if it’s time for your organization to make the switch to a self-funded health plan, captives may be a great tool to help smaller companies make the leap from a fully-insured model. We at Total Control Health Plans are here to answer your questions about captives and assist with a smooth transition to a self-funded plan that puts you in the drivers’ seat.
Interested in learning more about self-funded health plans and captives? Contact us today to chat with one of our team members about your options!
