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The Advantages of Medical Stop Loss Captives

Employers are continually seeking ways of lowering the expenses associated with employee healthcare coverage. These costs have risen dramatically over the past decade, and industry analysts suggest that expenses will continue to increase well into the future. Because of skyrocketing costs, employers are exploring alternative risk structures, including medical stop loss captive insurance. This alternative risk funding strategy – a form of self-insurance — has gained acceptance in corporations throughout the United States and abroad and represents a viable means of controlling healthcare expenses. In this guide, we will explore the benefits and advantages of adopting medical stop loss captives for risk management purposes.

What is a Medical Stop Loss Captive?

Captive insurance is an insurance company established and wholly owned by individual companies or groups of similarly-structured companies, referred to as insureds by the insurance industry. The primary purpose of any captive is to insure the risks of its owners/members. Members can also enjoy risk-sharing and underwriting profit distribution. Insurance captives were originally developed to address gaps in coverage or sparse availability of liability insurance products by traditional insurers. As an alternative to traditional insurance, this self-insurance model can take numerous forms.

A medical stop loss captive is a self-funded excess insurance solution; in essence, it provides insureds with protection against unpredictable or catastrophic losses related to healthcare. There are two types of stop loss excess risk coverage:

Specific Stop Loss – sometimes known as individual stop loss, this coverage provides protection for employers against any single high healthcare claim filed by any one individual, such as an employee of a company.

Aggregate Stop Loss – this coverage puts a cap on eligible expenses that an employer would pay for healthcare claims during a contract or coverage period. The insurance carrier reimburses the employer at the end of the coverage period for any aggregate claims.

Of course, there are many variations and options when setting up and administering medical stop loss programs. Members need to balance the expenses associated with traditional insurance coverages, the availability of those coverages, and the potential benefits medical stop loss captives offer.

Benefits and Advantages in Medical Stop Loss Programs

As an alternative to traditional insurance markets and the expenses or lack of suitable risk coverages associated with these markets, captives can offer significant advantages to employers. Medical stop loss captives’ advantages and benefits include:

  • Reduced reliance on traditional insurance – for businesses that have unusual or unpredictable risks, including excessively high single claims or frequent claims, coverage in commercial insurance markets may be prohibitively expensive. In some cases, suitable traditional insurance coverage may not be available at any price. Medical stop loss captives, then, provide a viable solution, allowing employers to develop the coverage types and limits needed to manage risks.
  • Reduced expenses of healthcare benefit administration – traditional insurance may hike up premium rates if excessive claims overwhelm policy limits. Over time, this can cause dramatic rises in overhead expenses. On the other hand, medical stop loss captives allow employers to manage expenses in several ways, including capturing underwriting profit when losses are less than predicted and generating investment income on premiums. Spreading risks over time is another benefit of the captives insurance model, ultimately stabilizing costs. Captives like medical stop loss programs can also bring together like-minded or similarly-configured companies within the same industry. This can provide substantial cost savings, as no one member is responsible for paying claims catastrophic claims.
  • Improved control and flexibility – captives give members the flexibility to assume risks that commercial insurers shun while managing market conditions. Captives like medical stop loss programs can also be tailored to member companies’ unique needs and risk exposures.
  • Better healthcare risk management – because the claims process is managed directly by the captive or a third-party servicer, employers can better understand the healthcare risks experienced by employees. Transparency in claims management is a powerful advantage, allowing employers to develop risk management strategies that protect business assets and employee health accordingly.

Medical stop loss captives are growing in popularity among all industry sectors. Much of the new growth in this alternative insurance market comes from smaller businesses, or those that employ fewer than 500 people. Captives provide cost-savings and profit-retention benefits that previously were only available to the largest corporations. Insurance industry analysts believe that continued growth in the captives market will drive price stabilization while providing improved coverage for companies and their employees.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.