Captive insurance adoption faces misconceptions
Interest in self-insured group captive insurance appears to be mounting, especially among middle-market employers, but there’s still widespread confusion about these arrangements that serve as a teachable moment for industry producers.
Mike Schroeder, founder and president of Roundstone LLC, cites five common misconceptions. They include concern that these captives will result in higher costs than a fully insured renewal, some companies are simply too small to reap any benefits, and self-funding is too complicated and requires additional resources.
Other areas include discomfort with the so-called “laser option” for known large ongoing risks (i.e., a separate deductible above the employer’s specific stop-loss deductible to protect the underwriting results of the captive), as well as level funding being less risky than self-funding in a captive.
A common denominator between self-insurance and captives is the desire for greater cost control beyond traditional insurance vehicles. In fact, the latter concept falls under the category of alternative risk transfer arrangements, which offer brokers and advisers a unique option when it comes to strengthening their strategic ties to clients.
Although the lion’s share of companies with 1,000 or more employees are self-insured, Roundstone has developed a model that allows organizations with as few as 20 employees to pool their risk, which becomes highly predictable and can drive down premiums. Any unused premiums are returned to employers that collectively own a captive at end of the underwriting year.
The company’s average captive participant receives an 8% distribution from underwriting profit, which Schroeder says isn’t considered in the maximum expected cost. He notes that “in a variable cost model like the medical group captive, when actual claims are less than expected, the employer retains 100% of savings.” The outcome is superior to fully insured arrangements because paying the maximum cost is “guaranteed” for those employers, he says.
There are other advantages to a self-funded group captive, which Schroeder says involves complete transparency and plan design flexibility, while “the captive mitigates the risk for large claims above the specific deductible. Clearly the medical group captive brings all the benefits of self-funding with low volatility without the high costs of level-funded products.”
Back to school
Given the sheer volume of insurance products that are constantly evolving, Schroeder knows that brokers and advisers have limited bandwidth when it comes to learning about something as complex as captive insurance. The upshot is that it takes time to teach them about the arrangement’s value propositions and challenges, which is what Roundstone University seeks to do through webinars and in-person training.
Schroeder also mentions that the International Center for Captive Insurance Education offers Associate of Captive Insurance and Certificate in Captive Insurance designations, which he describes as akin to a Certification of Property and Casualty Underwriting.
With brokers serving as pure-placement agents who are “not a party to the actual contract” of any captive they recommend, it’s necessary for them to acquire a meaningful education that cannot be done over the course of a weekend, counters David McDaniel, executive director of Captive Insurance Alternatives, LLC.
“Benefits brokers and a lot of the advisers out there don’t understand how captives work or the concept of pooling, and they definitely don’t understand the issue of joint and several liability,” he observes.
Experts include captive managers who usually are a CPA and report to regulators in a particular domicile to ensure the arrangement “meets all the requirements necessary to stay in business and not get sanctioned, or in the worst case, closed down,” McDaniel explains.
Educational opportunities about captives are increasingly vital as more employers decide to self-fund their employee health benefits. Presenting captive insurance to clients provides “a great platform” for producers to introduce cost-containment strategies that control volatility — especially for the middle market — and take on the role of problem solver, according to Schroeder. He cites a recent Kaiser study showing that the under-500 employee market for self-funding grew 30% “and a big chunk of that was in captives.”
However, McDaniel takes issue with Roundstone’s claim that its captive model can work for companies with as few as 20 employees. Although a huge proponent of captive insurance, he says it’s not for everyone.
Among the disadvantages cited on his website: the need to raise a substantial amount of initial capital to ensure financial stability during tumultuous times, the potential for inadequate loss reserves, stringent tax policies that have reduced much of the tax benefits originally enjoyed by captive owners and a potential spike in other coverage lines in the commercial market.
In order to make prudent decisions about captives on behalf of their employer clients, McDaniel believes groups like the Self-Insurance Institute of America need “to do a better job of getting brokers in to attend their meetings.” It also could help if something is done online to make the education process easier for industry practitioners, he adds.