This is the second of two interviews with Alex Gloeckner, senior vice president at Moreton & Company.
Details matter when you’re comparing captive models, analyzing stop-loss costs and seeking to understand captive value.
Alex Gloeckner, senior vice president at Moreton & Company, recently dived into those details for Alliance employers. Moreton works with The Alliance to manage ShareCap™, a medical stop-loss captive.
Comparing Captive Types
There are three major differences between a medical stop-loss captive such as ShareCap and the property and casualty (P&C) captives that are often businesses’ first exposure to captive savings, Gloeckner said.
- Difference 1: The Tail. The “tail” is how long it takes to complete the claims so the captive’s financial success can be assessed. Claims for medical stop-loss insurance are paid shortly after the care is delivered. But in a P&C captive, claims may be made months or even years after the underlying event, giving P&C captives a long tail. “So in a medical stop-loss captive, I can finalize the year’s financial results and pay any applicable dividend within six months,” Gloeckner said. “In comparison, a P&C dividend might take six years to pay out because of that tail.”
- Difference 2: The Amount Covered by the Employer. In a medical stop-loss captive, the employer still uses self-funding to cover a specified amount of claims before the stop-loss policy kicks in. The employer can set this amount based on risk preferences, so it may range from $50,000 to $250,000 or higher. In a P&C captive, the stop-loss coverage applies to any amount above the policy’s deductible.
- Difference 3: Total Risk Exposure Amount. In a medical stop-loss captive, participants typically buy umbrella coverage that kicks in when catastrophic claims exceed a specific amount. In a P&C captive, it’s possible there is no umbrella coverage, so the captive itself pays all claims. That makes it easier for employers to get into a medical stop-loss captive than a P&C captive, because there is less risk exposure. “The medical stop-loss captive will only represent an amount between 10 and 20 percent of your total medical spend, so it’s a smaller number,” Gloeckner said.
Gloeckner says it’s easier for employers who have already used a P&C captive to participate in a medical stop-loss captive because they understand key concepts.
Analyzing the Benefits
The process of analyzing the benefits of captive participation for a specific employer always starts by finding out what they spent in medical stop-loss premiums and what they received in benefits.
“A lot of people don’t know whether it’s a good idea to join, so it’s important to do the analysis to give them more information and to make sure they are a good fit for the captive,” Gloeckner said.
The actuarial analysis process for a captive mirrors the process used by stop-loss carriers. Berkley provides the captive’s umbrella re-insurance coverage and is a licensed insurer who can issue policies, so they also conduct the analysis and provide the quote.
“We use the same census, the same loss ratios and all the information a carrier would bid on if an employer was going to the market to get quotes on stop-loss coverage,” Gloeckner said. “We underwrite the rate as if Berkley were owning the risk. We’re never going to let an employer come in at a lower rate than they should be at, because we want to protect the captive.
“The whole point is to come in at the right premium, for you and for the captive.”
To start the ShareCap analysis, an employer must sign a letter of authorization. ShareCap then talks to the employer’s third-party administration (TPA) to get the claims data. Analyzing this data determines whether it’s worthwhile to move ahead with a quote on the premium for medical stop-loss coverage through the captive.
Analysis of Alliance employers to date shows there is “untapped potential” for medical stop-loss savings, Gloeckner said. Directly or indirectly, some employers currently allow an intermediary to “shop” their stop-loss coverage on the market.
That might net you one-year advantage if a stop-loss carrier seeks to gain business with a low quote, but it’s unlikely to consistently save money over time. The current turnover of a stop loss vendor’s clients is typically around 50 percent.
”If you’re just making a spreadsheet and comparing lots of companies, someone will always come in and buy your business for a year,” Gloecker said.
But a captive represents an effort to get ahead of the market so you can lower costs without relying on carriers to give you a one-year break. A well-managed captive retains 90 percent of participants each year.
’A Total Sea Change’
“This is a total sea change in your mind,” Gloeckner said. “Looking at many years and lots of numbers, it makes sense for many employers to not be in the stop-loss market any more. You own your market instead of renting it.
Alliance members can also increase their value by working together on initiatives that are designed to lower health benefit costs.
“This is a natural extension of the benefit of belonging to The Alliance, which is that multiple employers come together to find solutions, “Gloeckner said. Doing that well is likely to produce both savings and dividends.
Employers will also know who is running the captive and who else is in the pool. ShareCap participants gather with captive management at least three times a year to “roll up their sleeves” and work together to save money.
“Many clients have never met their stop-loss vendor; it’s just a name on their spreadsheet that compares premium quotes,” Gloeckner said. “With a captive, you know your partner and you work together to make it better.
”There’s a reason that captives are growing so much. “
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