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Medical Stop Loss in Captives

WCF Medical Stop Loss Panel
February 06, 2015

Providing medical stop loss insurance in a captive was one of the hot topics at the World Captive Forum 2015. Debbie Liebeskind of Towers Watson, Bruce Wright of Sutherland Asbill & Brennan LLP, and Jason Lichtman of JLT Re (North America) Inc. addressed this topic in a panel discussion.

Medical stop loss provides insurance protection to employers self-insuring medical benefits to mitigate the risk of large claims or unanticipated claims fluctuation. It can be specific stop loss, which essentially caps the amount the employer must pay for large individual claims that may occur, or aggregate stop loss to protect against an aggregation of claims in a year exceeding some stipulated amount. The U.S. marketplace for this coverage is about $5 billion per year.

The Affordable Care Act increased the need for this protection by eliminating some of the protections that employers could specifically build into their plans in the past. Specifically, they can no longer impose annual or lifetime maximums on the protection provided to employees.

Coverage is available from medical carriers and direct writers of medical stop loss. Generally the premiums charged by the direct writers are significantly (e.g., 30 percent) less than those charged by medical carriers.

Importantly, the medical reinsurance marketplace is even larger than the stop loss marketplace. As a result, reinsurance charges are even less than those of the direct writers. Reinsurance for a given client might be 50 percent less than the premium that would be charged by a medical carrier and significantly less than the premium that a direct writer might charge. The problem for employers is that it is available only as reinsurance, and they cannot access the market directly.

Enter captives. As an insurer, a captive can buy the reinsurance and take advantage of the lower cost. In addition to the lower cost, there are other potential advantages. It is not yet settled whether this insurance will qualify as unrelated business. If this is eventually accepted by the Internal Revenue Service, it could provide owners of single-parent captives with a mechanism to deduct all premiums paid to their captives. Using the captive may also increase the organization’s ability to retain more of this risk and thereby cut costs further.

Of course, there are also negatives. The first is the administrative and related costs associated with accounting, setting up agreements, filing a revised business plan with the captive’s regulator, purchasing the reinsurance, and the like. Depending on the jurisdiction, there may be a small premium tax or a direct payment premium tax payable. But the cost savings will offset these negatives for most large employers.

Unlike employee benefit plans, it is generally not necessary to file a medical stop loss insurance program with the U.S. Department of Labor to obtain an Employee Retirement Income Security Act exemption. The reason is that the insurance is covering the employer’s risk (of claims exceeding some retention) and not providing any type of benefit directly for employees. To preserve this, it is necessary that the employees not be required to contribute to the cost of the stop loss coverage.

An important caveat to consider before setting up one of these programs is the need to evaluate the captive owner’s situation with respect to deductibility of premiums paid to the captive. If the owner has justified the deduction of premiums paid based on the fact that the captive writes unrelated third-party business, including the stop loss coverage may change the mix of related versus unrelated business if this type of insurance is at some point deemed to be related business.

In summary, this is an innovative cost control solution that should be considered by captive owners. Of course, it will be necessary to carefully review the pros and cons, but for many large employers it will likely make sense.

The World Captive Forum 2015, held February 1-4 in Boca Raton, Florida, was attended by nearly 300 captive owners, managers, reinsurers, and other service providers.

(Pictured in the photo above are, from right, Ms. Liebeskind, Mr. Lichtman, Mr. Wright, and Hugh Rosenbaum, Towers Watson, who served as panel moderator.)

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