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The Rise of Captives as a Health Insurance Alternative

One of the largest overhead expenses for companies is that of healthcare insurance plans for employees. Medical expenses continue to rise, and traditional insurers are raising policy premiums while at the same time imposing more limits and exclusions each year. In order to combat the rising costs and dwindling coverage of traditional employee health insurance, many companies are turning toward a more cost-effective alternative solution: captive insurance. Self-funded and group captives represent a novel solution, allowing companies to provide valuable employee benefits while managing costs.

The Health Insurance Landscape

According to an article published in the October 2019 issue of Captive Insurance Times, employee healthcare is the second-largest expense employers face, lagging just behind employee salaries. Companies across the country are attempting to manage their overhead expenses; even with a red-hot economy, cost-cutting initiatives make sense in order to preserve assets for business growth. 

Despite federal mandates such as the Affordable Care Act and the availability of employer-sponsored health insurance plans, an estimated 8.5 percent, or just over 27 million people, of the U.S. population did not enroll in any health insurance plan in the year 2018. Many people in the working class cannot afford health insurance, especially as wages have stagnated in comparison to economic growth. Middle-market companies may also struggle with the steep expenses associated with employee health insurance plans. These factors have made captive insurance an attractive solution, particularly with smaller- and mid-sized business interests.

Advantages of Captives as an Alternative Health Insurance Plan

Companies opting to form captive insurance entities enjoy several benefits. Companies may also pool a portion of their resources with similar businesses in forming group or stop-loss captives. Benefits of such captive plans in providing health insurance coverage for employees include:

  • Reducing expenses associated with insurance – companies that use captives have the ability to monitor overhead, helping to lower costs. 
  • Profitability – in many cases, self-funded captives realize investment income and underwriting profits, particularly if claims and losses are low.
  • Tax advantages – if insurance premiums do not exceed a certain amount, companies that use captive insurance solutions are able to deduct any losses before payments have been made. 
  • Better risk management – by having access to claims data – unlike in traditional insurer relationships — companies are better able to identify risks and therefore to manage those risks through loss control and hazard prevention.

The most important benefit in using captives to replace or supplement traditional employee health insurance plans is their flexible nature. Coverage under captives can be tailored to a company’s unique risk profiles and needs, especially in industries with risks that may be hard to find coverage for in the traditional insurance market. 

Group Captives for Healthcare Insurance Coverage

As mentioned earlier, smaller companies can pool their resources to form group captive insurance entities. Typically, small- or mid-sized companies with similarities in business model or industry niche can come together in a group captive format. The advantage of this is that no one company faces the financial hardships associated with high claims activity; by pooling resources together, all companies that participate gain financial stability. Better yet, any surplus in unused premiums, such as in years with low claims activity, is returned to the group captive members as a dividend. 

All of the same benefits apply to group captives as with self-funded captive insurance companies, like tax advantages and overhead cost control. These group captives also provide flexibility to the companies participating, allowing them to get insurance coverage customized to the unique needs of the members. This is especially beneficial for companies that may not be able to afford traditional insurance coverage or which may have high risk profiles that traditional insurers are reluctant to cover. 

With group captives or individual captive insurance solutions, companies can continue to provide cost-effective employee benefits for their most valuable assets: their workers. Rising premium costs and reduced coverage in the traditional insurance market will influence further captive growth in the coming years, and as an alternative solution, captives offer significant benefits for companies of nearly every size and configuration. 

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.