Every year employers search for new and innovative ways to provide their staff with an employee benefits package that gives them a competitive advantage when it comes to recruiting and retaining top talent. And there are many different approaches a business can take to become more competitive in its recruitment and retention.
But one of the popular, and most vital, strategies to attract and keep your best employees is through a top-tier employee benefits program. And, to be more specific, one of the most significant pieces of your employee benefits package is your company’s health insurance plan.
Despite the rise of work perks like free lunch, games in the break room, or unlimited PTO, the most popular employee benefit remains a quality 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.
Still, when it comes time to select a health plan, making a decision can quickly lead to hair-pulling levels of confusion. Choosing between self-funding or fully funded, HDHP or PPO, or any number of other options is difficult and time-consuming.
In this article, we’ll tell you about one type of health insurance plan you might not know a lot about but could help you save time, your business save money, and your employees become healthier. So, keep reading to find out what a captive insurance policy can do for both you and your staff.
What is Captive Health Insurance?
A captive insurance plan is a form of health insurance in which a group of businesses unites to form their own independent “insurance company.” The primary purpose of a captive plan is to insure the risks of its owners, aka the employers who banded together to form the captive.
Essentially, a captive insurance policy is designed to protect business owners from the risks which naturally arise from your business operations. Plus, utilizing a captive health program gives you more control and ownership over your health plan, which can lead to healthier employees, and more money to put towards other areas of your business.
Pros of a Captive Health Plan
There are several advantages a captive health insurance policy can provide 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.
A captive insurance plan may not be for everyone. But, if you examine the pros and cons and determine the advantages outweigh the disadvantages, you should act right away. Any delay in your switch could cost your employees and your business as a whole.
Plus, according to a 2014 white paper from Willis Towers Watson, the average captive arrangement returned an annual surplus of 5.1 percent. Similarly, the median captive return was even higher at 11.3 percent.
So, when it comes to changing your health plan, don’t be held captive by your fully-insured health program. Invest in a captive insurance plan and free yourself from traditional insurance’s shackles.