What’s Your Risk Appetite?

Joining a captive is a little like deciding whether to try a new entrée for the first time.

No matter how many times you’ve been told it will be delicious, you’ll never enjoy the taste unless you’re willing to take the risk of ordering it.

And if you’re not interested in taking that risk, you’ll likely settle for never learning just how tasty it could be.

Risk Philosophy Matters

Alex Gloeckner, senior vice president, Moreton and Company, says your risk philosophy typically determines whether you are a good prospect for joining a medical stop-loss captive. Moreton works with The Alliance to manage ShareCap™, a medical stop-loss captive.

“By being in a captive, an employer is assuming more risk than simply buying a stop-loss policy from a carrier,” Gloeckner says. “So it is important than an employer define and understand their overall appetite for risk beyond their own business model.“

Gloeckner describes an organization that is likely to participate in a captive as having an outlook that leads it to say, “Yes, we‘re willing to take opportunistic chances.” This type of organization likes a well-managed risk in exchange for a clearly defined reward. The organization also has sufficient cash flow so to take advantage of the opportunity.

“The captive mindset mirrors the business mindset,” Gloeckner added. “In ShareCap, we’re looking to find those organizations that have an alignment between their risk philosophies and the captive.”

A Different Risk Pool

A key element of any well-designed medical stop-loss captive — is that the risk is shared among a carefully screened group of participating companies. While joining a medical stop-loss captive can make it sound like organizations are taking on “new” risk, the reality is that sharing stop-loss risk is already part of the equation for self-funded organizations.

“Any time you purchase insurance, you are transferring your risk into a larger pool,” Gloeckner said. “You’re paying a premium in the hope of getting a benefit if and when you have a claim. So if you’re purchasing stop-loss insurance, you’re already sharing the risk.”

A medical stop-loss captive simply gives you more control over that risk.

”In a traditional approach to medical stop-loss insurance, a carrier owns that pool, with the risks and rewards residing behind a very high wall with a closed gate,” Gloeckner says. “In a captive, we allow the members inside that gate so they can embrace the risk, take steps to manage it and, if there’s a dividend, share in the reward.”

Of course, the risk still exists within the walls. Depending on the medical stop-loss claims experienced by the captive, the participants may pay less or more compared to a traditional stop-loss policy in a specific year. Over time, captives are designed so that participants typically come out ahead.

Controlling the Risk Pool

Captives are able to come out ahead because they use an analysis of stop-loss ratio to control who is in the pool with the participants.  That gives participants a better opportunity to save on premiums and earn dividends.

As captives mature, captive members can embrace solutions that help manage risk or reduce premiums. Gloeckner said captives seek out solutions that help bring down the cost of health care so both the individual employer and the captive will benefit.

“If there’s any approach or procedure that can be measured and scrutinized, then the pricing can be brought down,” Gloeckner said. “For example, if captive members can say, ‘We paid a lot of money for that drug last year,’ then it creates an environment of action where you look for ways to save money on that drug.”

What’s the Return?

So how much can captive members expect to save?

”I would say realistically that if someone were to look at their own medical stop-loss premium, in a typical ’good year,‘ you might see a 10 to 15 percent return on the money invested in the captive,” Gloeckner said. That return comes in the form of dividend of current year premium as well as lower renewals than the standard stop loss market can quote.

But Gloeckner adds that the potential return is never guaranteed, “Because remember, it’s not just how your claims run, it’s how the claims for the entire captive run. You might do well but captive doesn’t, or the reverse might be true.” In a worst-case scenario, you could spend roughly 10 percent more in the captive than buying insurance through the stop-loss market.

Gloeckner noted that companies that are risk averse sometimes scoff at the notion of beating the stop-loss market. On the other hand, companies that are receptive to taking on more risk relish the potential of earning a return.

“When we started our captive, one of the participants who was willing to take on risk to get a taste of rewards put it like this:  If I get $1 back in dividends, that’s $1 more than I’ve ever got back by buying stop-loss outside the captive.”