1. Employee Benefits and Healthcare – Current Captive Impacts
Presented by:
Moderator: Anne Marie Towle, CPA, VP & Senior Consultant, Willis
Troy Filipek, FSA, MAAA – Principal and Consulting Actuary, Milliman
Mark Smidt – Director, EBMS Re
Kyle Plath – Senior VP, Trean Re
Wednesday, September 28 1:30 – 2:45 pm

2. Agenda Healthcare Captives – Why and how?
Impact of Healthcare Reform (PPACA)
Case Study – EBMS and Trean Re
Discussion and Questions

3. Healthcare Captives
Why Captives for Healthcare? Similar as for other lines of business . . .
Reduced insurance expenses
Possible tax efficiencies
Cash flow management
More efficient use of capital (i.e., float)
Ability to develop custom insurance programs – more flexible than commercial market

4. Healthcare Captives But healthcare is also different . . .
Short term vs long tail expenses
Generally predictable claim patterns
Uncorrelated exposures relative to traditional risks held in captives
PPACA pressures

5. Healthcare Funding Three types of funding mechanisms traditionally
Fully insured – All risk transferred through premiums
Self insured – All risk retained; use health plan to access network and pay claims
Hybrid – Self insure with stop loss (aggregate and/or specific) to transfer catastrophic risk
Stop Loss
Specific – Per person catastrophic
Aggregate – Total employer costs

6. Option 1: Jumbo Employers
Works for sponsors with > 10,000 ees
Huge advantage to already have a captive in place that insures other uncorrelated risks
Option 1a - Medical stop loss coverage only
Generally includes steep risk margin in commercial market
More later in case study
Option 1b – Reinsure ERISA benefits (e.g., group life, disability, AD&D)
Employer acts as reinsurer and needs Prohibited Transaction Exemption (PTE)
Administrative and regulatory requirements big
Results
Lower costs for same protection
More premium and spread of risk in captive

7. Option 1: Jumbo Employers
Administrative and Regulatory Issues
DOL must approve PTE under Option 1b since ERISA prohibits economic gains from providing benefits
Need A-rated fronting insurer per DOL
Need competitive rates and year 1 benefit enhancement
Capital and surplus requirements
Need competencies in running captive
Beware NAIC tightening of stop loss model law – Forces employers of all sizes to retain larger portion of risk

8. Option 1: Jumbo Employers
PTE Process (Option 1b)
Conduct feasibility study (cost/benefit analysis)
Get help fast
Captive manager
Attorneys
Independent fiduciary – Opine on PTE compliance
US branch approval – domiciled jurisdiction if not a US captive
Negotiate contract with A rated fronting insurance company
File for PTE with the DOL and implement plan

9. Option 2: Smaller Employers
See some sponsors with < 100 ees push to self funding under PPACA
Pool together risks across employers
Hybrid funding noted earlier – stop loss through captive
Historically, RRGs used to get around state licensure requirements, but state lawsuits slowed this trend
Employer specific self funded plan, attachment point, pricing, etc.
Results
Lower costs than fully insured
Lower costs than commercial stop loss

10. PPACA Influence PPACA – Health Insurance Reform
Costs continue to rise and many fear PPACA makes it worse
New issues and concerns
No annual or lifetime benefit maximums
New mandates (e.g., $0 preventive with expanding definition)
New entities – Exchanges, Co-ops, Accountable Care Organization, etc.
New regulations (e.g., no medical underwriting, minimum loss ratios) and fees (e.g., insurer fees)

11. PPACA Influence Employers - Much more interest in self-insuring to:
Avoid community rating for groups with better than average risks
Avoid fees imposed on fully insured plans
Avoid benefit mandates
Take advantage of new offerings from savvy brokers and carriers

12. PPACA Influence Other entities
Provider groups / ACOs: Historical management of financial risk did not go well, consider other options with financial risk coming back
Co-ops: Not for profits established to compete with insurers, likely will need help with risk management / transfer / funding

13. Using Captives to Smooth Out Medical Stop-Loss Insurance Expense
Mark Smidt – Director of EBMS Re
Kyle Plath – Senior VP of Trean Re

14. Time-Frame EBMS Entered the Stop-loss
Arena –
Significant Cost Adjustments from Stop-loss Insurance Markets
Stop-loss Carrier’s Actions to Correct Soft-Pricing Included:
Lasers
Steep Renewal Increases
Non-Renewals

15. Objectives of EBMS’ Captive Program
Stabilize Stop-loss Insurance cost through:
Eliminating lasering and non-renewals
Pooling the risk
Renewals based on actuarial models, not individual experience rating = effectively eliminating spikes
Profit sharing – achieved thru renewal discounts (Premium Discounts)
Create efficiencies by eliminating duplications of efforts
Specific Reimbursement turnaround times – reimbursement authority
Renewals able to be “locked-in” based on 10 months of experience
Create a “partnership” atmosphere for clients – Annual “Advisory Meeting”
Access to underwriting staff

16. Captive’s Risk Layer
“Leverage Trend” offset at the Captive’s risk layer 2002 = 150k multiplied by 10.5%(8) = 368k

17. Current Specific Risk Assignment
Plan Sponsor's Risk Layer = Spec Deductible/SIR
EBMS Re’s Risk Layer - First $300K above SIR
XS Reinsurance Risk Layer - Up to $1million xs of EBMS Re’s Retention
XS Reinsurance $1M xs $1M
XS Reinsurance $3M xs $2M
XS Reinsurance $5M xs $5M
XS Reinsurance $10M xs $10M
XS Reinsurance $Unlimited xs $20M

18. Gross Premium by Underwriting Year (Millions)
ESTIMATED

19. Average Specific Deductible by UY (Weighted by Employee Lives)

20. Premium Credit Triangle – Block
Calendar Year:
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Client’s % of Total Prem
100%
UY 2002:
Maturity Period
30%
15% 5%
20%
Final Adjustment
UY 2003:
UY 2004:
UY 2005:
UY 2006:
UY 2007:
 30% 
UY 2008:
UY 2009:

21. 2002 to 2009 Combined Allocation of Income (Inception to Date)

22. Program Flow Chart Benefit Plan Net Results “Pooled” EBMS EBMS Re
Stop-Loss Administrator
EBMS Re
EBMS Captive (Reinsurer)
Issuing Carrier
Stop-Loss Carrier
Excess- Loss Reinsurer
Net Results
“Pooled”
Stop Loss Policy
Administration
Agreement
Quota Share
Reinsurance
Contract
Premium
Discounts
Excess of Loss

23. Considerations in Forming a Captive
Domicile
EBMS originally selected Cayman Islands and redomesticated to Montana
Captive Structure
EBMS originally formed as a single cell captive and has transitioned to a segregated cell structure in Montana

24. Considerations in Forming a Captive
Capitalization and Ownership
EBMS chose to fund the start-up capital and maintain 100% ownership of the captive
Risk Structure
EBMS purchased Specific Excess Reinsurance from the inception of the program, increasing its retention as the premium volume has grown

25. EBMS Re’s Structure Issuing Carrier EBMS Captive
Excess Loss Carrier (or Issuing Carrier) on the program
Has given the Captive the authority to underwrite and issue stop-loss policies in their behalf
Maintains the necessary ratings and licensures for the captive to operate.
Contracting body for the program’s reinsurance carriers & ensures the financial integrity of the entire program
EBMS Captive
Quota Share reinsurance company on the program as well as the underwriting body
Professional Reinsurer
Provides Excess Loss reinsurance coverage for the program
…cont.

26. EBMS Re’s Structure Trean Reinsurance Services EBMS
Program’s Reinsurance Intermediary. Facilitates the “marriage” of all the carriers and reinsurers associated with the program
EBMS
Staffing support in: underwriting, policy issuance, administrative support, claim auditing, management, marketing
Capital Investment

27. Questions???