As healthcare costs continue their upward climb, Dale Sagen, vice-president and business development Leader at QBE North America, explains how medical stop-loss risk is an appealing target for captive professionals
Health plan costs for employers are on an upward trajectory, annually rising 4%, 5% and 7% in 2021, 2022 and 2023, respectively, and on a course to increase another 7% in 2024, according to the International Foundation of Employee Benefits Plans1.
If past is prologue, the cost of traditional employer-provided health insurance will continue to rise.
There are several reasons why this is likely to be the case: medical inflation, technological advances, unhealthier populations and government policies have combined to increase health insurance premiums, deductibles and out-of-pocket expenses.
Research suggests that the cumulative increases in healthcare costs over the past two decades continues to surpass overall prices2, reaching a point where the average annual health insurance premium for family coverage in 2023 was $23,9683.
To better manage these costs, many companies opt for self-funded health plans, in which the employer assumes the financial risks of paying claims as they occur, as opposed to paying premiums to an insurance company regardless of claims activity.
The cost savings can be significant when the health plan leans into risk management, reducing the frictional costs and insurer profit.
With a self-funded plan, the employer retains this potential windfall. Small wonder that, at present, 60% of all employees under the age of 65, or more than 80 million people, are currently covered by their employer’s self funded health plan4.
The chief risk in such alternative risk-transfer methods is the possibility of catastrophic medical costs on a per employee and aggregate employee basis.
Typically, self-funded health plans transfer this risk above a certain financial threshold to a medical stop-loss insurance company.
Much like the traditional health insurance market, the cost of medical stop-loss insurance is also on an upward trajectory, which has many professionals in the employee benefits market scrambling for solutions.
The principal reason is the growth in catastrophic medical claims. As noted in QBE North America’s 2023 Accident and Health Market Report, 3.5% of the employer groups insured by the company in 2018 experienced at least one health plan member with a claim exceeding $1 million.
In 2022, the percentage more than tripled to 12.4%. The impact on the $31.6 billion commercial medical stop-loss insurance market is severe: the average gross loss ratio was 84.1% in 2022, up from 80.5% in 2020.
The high-dollar catastrophic claim costs have necessitated substantial rate increases. According to a recent survey on medical stop-loss insurance by AEGIS Risk, individual premiums in the standard market in 2023 are up between 6.9% (at the $100,000 deductible level) and 15.9% (at the $500,000 level)5.
Higher medical stop-loss premiums were cited as one of the top five reasons for elevated health plan costs by the International Foundation of Employee Benefits Plans6.
Much like the self-funded plan itself, self-insuring the medical stop-loss exposures is a viable alternative for employers, in this case via a captive insurance facility.
Many of the same financial advantages provided in an employer-sponsored self-funded health plan are attainable through a captive solution, including the opportunity to capture underwriting profits and investment returns.
By shifting the profit typically retained by the medical stop-loss insurer into the captive, the benefits of the self-funded plan approach are amplified.
Interest among self-funded health plans in forming captive solutions for catastrophic medical stop-loss costs is up by 50% in the past year, rising from 10% in 2022 to 15% in 2023, according to the AEGIS Risk survey7.
Further growth may be at hand via the creation and use of segregated cell captives. Most catastrophic stop-loss captive structures developed to date have been single-parent captives created by large organisations and group captives developed by like-minded mid-sized and larger companies to insure portions of each other’s risks.
Although multiple organisations with fewer than 200 employees can achieve the same benefits as their larger counterparts by forming a group stop-loss captive, many captive managers and advisers like insurance brokers and agents historically had little interest in creating the facilities.
The main reason was the time, energy and costs involved in retaining service providers to address complicated regulatory requirements for such a small captive opportunity.
Another challenge lies with employee benefits managers, who may not fully understand the benefits provided by a medical stop-loss captive solution.
To bridge the knowledge gap and enhance buy-in on the value of the concept, benefits managers need guidance from the internal risk management organisation about the alternative risk-transfer strategy.
Assuming greater awareness and interest, captive managers and advisers spending much of their time engaged in property and casualty captives may find it less time-consuming to launch such vehicles.
Segregated cell captives
A case in point is a segregated cell captive. Ample opportunities now exist to get a medical stop-loss captive up and running quickly, via a segregated cell captive approach that reduces the barrier of entry and isolates the balance sheet to the company’s chosen risks.
Once the client’s medical stop-loss captive is at sufficient scale, the captive manager may decide to move the cell captive into a larger captive facility that includes the company’s property and casualty exposures, augmenting the client’s risk profile.
Similarly, the insurance broker serving the employee benefits function has the ability to capitalise adjacent revenue growth opportunities by cross selling the firm’s property and casualty services to the company.
As the relationship with the client progresses and knowledge about its industry accumulates, both captive managers and captive advisers may decide to build out a captive programme for the vertical, developing a group captive for cyber risks, general liabilities, workers compensation and other diverse exposures in various sectors.
These varied prospects may be attainable once the medical stop-loss is transferred to a captive solution and the client has a foundational understanding of basic captive strategies.
With an all-encompassing captive service model that removes barriers to entry and allows for frictionless movement to new strategies, QBE North America is well positioned to support captive managers and owners.
We can help bridge the divide between professionals in property and casualty risk management and employee benefit professionals by developing a tailored captive insurance programme that is focused specifically on medical stop-loss risk.
12023 Survey Results. International Foundation of Employee Benefits Plans. Available at: https://www. ifebp.org/pdf/health-care-costs-report-2024.pdf
2The state of the U.S. health system in 2022 and the outlook for 2023. Peterson-KFF Health System Tracker. Available at: https://www. healthsystemtracker.org/brief/the-state-of-theu-s-health-system-in-2022-and-the-outlook-for2023/#Total%20deaths%20in%20the%20United%20 States%20from%20COVID-19%20and%20other%- 20leading%20causes,%202020-2022
32023 Employer Health Benefits Survey. Kaiser Family Foundation. Available at: https://www.kff. org/report-section/ehbs-2023-section-1-cost-ofhealth-insurance/
4Medical Stop Loss Captives: Issues & Answers. QBE North America. Available at: https://www.qbe.com/ us/newsroom/qbe-insights/medical-stop-loss-captives-issues-and-answers
5Aegis Risk Medical Stop-Loss Premium Survey. AEGIS Risk. The survey measures data from 799 plan sponsors covering over 845,000 employees with $727 million in annual stop-loss premium. Available at https://www.aegisrisk.com/copy-ofstop-loss-premium-survey-header
62023 Survey Results. International Foundation of Employee Benefits Plans. Available at: https://www. ifebp.org/pdf/health-care-costs-report-2024.pdf
7Aegis Risk Medical Stop-Loss Premium Survey. AEGIS Risk. The survey measures data from 799 plan sponsors covering over 845,000 employees with $727 million in annual stop-loss premium. Available at https://www.aegisrisk.com/copy-ofstop-loss-premium-survey-header