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Leveraging Insurance Captives to Better Manage Employee Health Plan Costs in the Wake of COVID-19

The pandemic will likely accelerate health care costs, pushing many companies to self-insure and adopt other cost-saving strategies.

Leveraging Insurance Captives to Better Manage Employee Health Plan Costs in the Wake of COVID-19

This content is sponsored by QBE North America.

The rising cost of healthcare has long been a concern for companies. A 2020 Kaiser Family Foundation study found that premiums for employer-sponsored health insurance topped $21,000 per employee family.1 Continued advances in treatment — especially in novel gene, cell, and orphan therapies — will likely accelerate this rise in costs and pressure employers’ bottom lines even more.

Meanwhile, the full impact of COVID-19 on costs has yet to be determined. Evidence of people delaying preventative care screenings and non-critical treatments during lockdown suggests that cancers and other illnesses may have had more time to progress into serious and costly-to-treat stages.

The pandemic has also pushed many companies to adopt a more holistic approach to employee benefit offerings. Going beyond traditional benefits, companies have emphasized work/life balance flexibility and assistance to help foster emotional well-being and alleviate stress. According to the Kaiser Family Foundation, “during the pandemic, 4 in 10 adults have reported symptoms of anxiety or depressive disorder, a share that has been largely consistent, up from one in ten adults who reported these symptoms from January to June 2019.”1 From our own data for Medical Stop Loss, we saw the frequency more than double for mental illness claims exceeding $200,000 during the pandemic, as noted in our 2021 Accident & Health Market Report. The pressure to expand benefits appears to have further increased with the current labor shortage, as the quality of benefits continues to factor greatly in the competition for talent.

To better manage rising costs and expand benefits, companies are increasingly self-insuring and adopting captive structures. Captives can produce savings by allowing the employer to reduce fixed insurance expenses and capture underwriting profits and investment returns that would otherwise revert to an insurance company in a traditional insurance model. Savings have been estimated to be between 10-30%.2 

Large organizations were first to take advantage of self-funded captives. Today, 84% of workers in large firms are enrolled in self-funded plans1, and approximately 90% of Fortune 500 companies have captive subsidiaries.3 Midsize companies followed as group captive structures evolved and allowed companies to band together and achieve the scale to make self-insuring and the captive model practical, thereby gaining protection from volatility through pooled risk.

The cost advantage of captives comes from shifting the profit typically retained by the commercial carrier into the captive, with a lower expense charge as compared to traditional fully insured coverage. Better plan stability and savings can result from captive retention and management of the layers of predictable risk, while insuring higher layers of risk that may be less likely but threaten stability. Other financial advantages may include better control of cash flow, flexibility of plan and cost containment measures, pricing stability and, in some cases, tax benefits and potential increased investment income.

Captive solutions can also offer companies a clearer view of claims and potential exposures, as well as access to experienced third parties to help manage risk. Combined with Medical Stop Loss, these solutions help company health plans to tailor solutions and budget frequently, which helps them have more flexibility in the benefits provided to employees, while supporting stable costs. This type of flexibility was especially important during the height of the COVID-19 pandemic. For instance, many Medical Stop Loss insurance carriers helped reduce concerns over coverage for furloughed employees, with several agreeing to extend coverage to them by temporarily waiving the policy’s actively-at-work provision.

As midsize companies continue to compete for talent while contending with the rising cost of healthcare, the provision of holistic employee benefits will play an even greater role in a company’s ability to grow. The potential for self-funded captive solutions, especially group captives, to provide flexibility and cost benefits warrants consideration by midsize companies as they seek to maximize the health, well-being, and engagement of their employees.

“This article is for general informational purposes only and should not be construed as legal, commercial or other professional advice.”

  1. 2020 Employer Health Benefits Survey, KFF, 10/08/20, https://www.kff.org/report-section/ehbs-2020-summary-of-findings, accessed 8/13/21
  2. Aon’s 2019 Global Risk Management Survey
  3. https://content.naic.org/cipr_topics/topic_captive_insurance_companies.htm

Matt Drakeley is the vice president of Accident & Health Specialty Markets at QBE North America.