Pros & Cons of a Captive Health Plan: What Are The Advantages And Disadvantages of Captive Insurance – In this post, we’ll discuss a sort of health insurance plan that you may not be familiar with but that could help you save time, money, and make your staff healthier. Continue reading to learn what a captive insurance policy can accomplish for you and your employees.
Every year, employers look for new and imaginative ways to provide their employees with a competitive employee benefits package that will help them recruit and retain top talent. And there are a variety of measures a company may take to improve its recruitment and retention efforts.
However, a top-tier employee benefits program is one of the most popular, and crucial, tactics for attracting and retaining your finest staff. And, to be more specific, your company’s health insurance plan is one of the most important components of your employee benefits package.
Despite the development of workplace perks such as free food, break room games, and unlimited PTO, the most popular employee benefit remains a good health insurance policy.
According to a 2018 Gallup survey, the number one benefit option your employees desire the most from their job is health insurance.
When it comes to choosing a health plan, though, making a decision can rapidly become a hair-pulling experience. It’s tough and time-consuming to choose between self-funding or completely funded, HDHP or PPO, or any of the other possibilities.
What is Captive Health Insurance?
Captive insurance is a type of health insurance in which a group of companies band together to form their own “insurance company.” The basic goal of a captive plan is to insure the risks of its owners, which are the employers who formed the captive.
A captive insurance policy is meant to protect business owners from risks that develop organically as a result of their operations. Furthermore, using a captive health plan provides you more control and ownership over your health plan, which can lead to healthier employees and more money to invest in other aspects of your organization.
Pros of a Captive Health Plan
There are several advantages a captive health insurance policy can provide to both business owners and their employees.
1. Greater Control
The first edge a captive plan gives your organization is a more considerable amount of control. Because you, the employer, are the policy owner, you may tailor your health insurance to exactly match your most common business risks. Similarly, customizing your policy can give you access to coverages that would otherwise be unavailable or too expensive to obtain in the commercial marketplace. This access allows employers to cover staff members for operations or medications that otherwise wouldn’t be possible through the traditional insurance market.
2. Increased Stability
Another advantage a captive plan can generate is increased stability in your health plan. By pooling together with other employers, even small business can gain the economies of scale, which make it possible to purchase a group plan at a discounted rate. Also, the deeper your pool of employees, the more likely your plan rates and information will remain stable.
Similarly, because your plan’s renewal rate is tied to your company’s history and individual claims rather than an industry benchmark, your captive program can stabilize year-to-year rate increases. No longer is your company at the will of the insurance carrier, which increases the stability and predictability of your health plan.
3. Improved Transparency
Through a captive insurance program, your company can access population and plan data easier and, in more detail, than you could through a typical fully-insured health plan. With this improved data, you can help employees who need it the most, and ensure every employee receives the best care at the best price. This improved treatment can help you promote greater health among your employees.
Additionally, a greater amount of transparency can help your business keep health insurance plan costs down. In the traditional insurance market, prices are generally set in relation to the industry, as opposed to the company’s loss history or individual trends. With a captive plan, your firm’s loss history and individual trends are a foundational piece of the pricing of your policy.
Due to this fact, your business can purchase insurance in a wholesale manner rather than a retail manner. Purchasing wholesale allows you to cut out the middlemen who increase costs to cover their overhead. But, because you own the insurance company, you can use your claims data to demonstrate the stability of your plan and avoid huge renewal increases.
4. Reduced Costs
One of the most significant advantages of a captive health insurance plan is its ability to reduce your company’s healthcare spend. The first way a captive health policy can save your business money is by reducing your fixed healthcare dollars. Under a fully-insured policy, plan costs are 100 percent fixed.
Keeping your insurance plan’s fixed costs at 100 percent means if you have low claims, the insurers keep the profit, and if you have high claims, you get a severe renewal increase. Under a captive solution, you may see your fixed costs fall as low as 20 to 35 percent of your total healthcare spend. This percentage means the remaining 65 – 80 percent of your expenses are made up of variable claim payments. In other words, employers can retain up to 80 cents of every dollar they invest in their healthcare plan.
Cons of a Captive Health Plan
As with any decision, there are several downsides, or potential downsides, to choosing a captive health insurance program.
1. Your Capital is at Risk
The number one disadvantage of a captive insurance plan is the fact your company must put its own capital at risk. Anyone wishing to purchase a captive policy of their own must be able and willing to, invest their own resources into the policy. Plus, there’s always a chance you underestimate your necessary protection level and must quickly raise more capital to cover your claims.
2. Quality of Service Issues
As we’ve covered, captive insurance is a self-based product. Because you’re responsible for the operation of your captive, the quality of service is often dependent on the insurer’s personal efforts. Your firm may utilize a third-party administrator to manage the captive, but this may still result in inadequate or inconsistent service.
3. Barriers to Entry and Exit
The final con to a captive insurance arrangement is the possibility of barriers to entry and/or exit. Sometimes these policies can be difficult to purchase compared to what’s available on the open insurance market. Also, some of the same barriers to entry, exist for those seeking to leave their captive insurance. These barriers are designed to prevent unwanted changes to the insured pool but may make it more challenging to enter or leave the captive plan.
It’s possible that a captive insurance plan isn’t right for everyone. However, if you analyze the benefits and draw the conclusion that the benefits outweigh the drawbacks, you should take action right soon. Any delay in making the changeover could cost your employees and your company money.
In addition, according to a Willis Towers Watson white paper from 2014, the average captive arrangement generated a 5.1 percent yearly surplus. Similarly, at 11.3 percent, the median captive return was significantly greater.
So, don’t let your fully-insured health plan hold you hostage when it comes to altering your health plan. Invest in a captive insurance plan to break free from standard insurance’s restraints.