In 1970, iconoclastic author Tom Wolfe famously wrote his essay and later book, Radical Chic. Wolfe attempted to pillory certain who, in his opinion, invited radical individuals to swank Park Avenue soirees to bolster their reputations rather than for social good. Whether or not that was a fair assessment, the phraseology works today for a new trend in employee benefits, which we call Insurance Chic. That is the promotion of insurance captives as something exciting and hip—and not as what it really is, a specific, narrow tool for potentially lowering the net cost of stop-loss insurance.
The health insurance world is often staid and boring, so from a marketing perspective something that can be presented as exciting and cutting-edge (and what the “smart people” buy) can have real potential. It is the closest the employee benefits world can come to offering something “sexy.” That is all well and good if it is real, but in the case of a traditional insurance captive for health insurance, it is not. “Captives” (as they are commonly called) are often marketed as ways to save money and control healthcare costs. The problem is that the captive itself is simply a tool to share a layer of stop-loss risk with a limited number of other employers, generally ones that have no connection to each other. A very simplified example would be the brining together of ten employers that purchase stop-loss coverage for their respective health plans. The claims of those plans do not mingle, but the captive collectively puts the ten employers at risk by pooling the first $200,000 of stop-loss payments for each claimant. The captive would then purchase, for example, not a $100,000 stop-loss deductible from a carrier but rather a $300,000 deductible. The $200,000 risk corridor would be reinsured by the ten employers themselves, funded (it is hoped) by the premium savings between a $100,000 and $300,000 deductible. Captives have their own administrative costs and employers can be forced to put up risk capital at the start.
Beyond the above, the plan is typically just a self-funded health plan. The potential to control costs with a self-funded plan is great, with many possible tools and resources that we at SIE can provide. However, the ability to potentially save some money on the stop-loss plan generally pales in comparison to the real money that can be saved by the tools and resources mentioned above. Captives might be attractive to the really sophisticated buyer who has chosen to focus on the stop-loss costs and is willing to take some additional risk—and we at SIE are happy to facilitate point by point that detailed discussion—but in our opinion they should not be bought just because some consulting firm positions them as a hip way to buy a health plan. There are many ways an employer can look to save money through self-insurance, and those ways work just as well with traditional stop-loss insurance as with captive stop-loss insurance. Thus the purchase of a captive layer of stop-loss insurance we believe should be made on its own merits and not because of a marketing hook used to get the buyer interested.
Note: we know of some good, forward thinking plans designed by very knowledgeable consultants that have important tools and resources attached to lower healthcare costs also happen to be bundled with a captive. If an employer or plan sponsor wishes to see a proposal from such a plan, we will be happy to provide one.