Since 2020, employers are increasingly joining captive insurance programs, in which a group of forward-thinking and like-minded employers become stakeholders in an insurance company and combine risk to increase their power. Though they have the potential to offer employer members reduced medical stop loss volatility, large group purchasing power, data and claims transparency, and more, most captives are run inefficiently and responsible employer members become the victims of adverse risk retention (ARR).
Benefit advisors — keep reading to learn all about ARR: what it is, five of its biggest repercussions, and one action you can take to break the cycle of ARR and help employer clients avoid it.
What is Adverse Risk Retention?
Simply put, ARR is a cancer that plagues most captive insurance programs. It’s spreading as the nation’s largest captives continue to retain high-cost employers, or ‘bad risk’, by subsidizing their uncontrolled costs onto low-cost employers, or ‘good risk’. This is exacerbated when the captive offers all employer members the same rate caps and no new laser provisions, regardless of if all employers deserve it or earned it.
5 Reasons Adverse Risk Retention is Damaging
ARR can lead to disproportionately higher premium pricing for employer members doing all the right things. Such ‘good risk’ employers are understandably prone to exit the captive, leaving predominantly ‘bad risk’ behind and contributing to a cycle of continuous decline that can have major repercussions. The five most common are listed below.
- Capital Strain: If the captive faces unexpected large losses, it may have to dip into its reserves, which could deplete the capital base over time.
- Increased Premiums: Higher premiums can lead to a higher total cost of risk retention, reducing the overall effectiveness and benefits of being in a captive insurance program.
- High Volatility: Volatility can make financial forecasting and budgeting a challenge.
- Reduced Flexibility: If too much of its capital is tied up in covering past or potential losses, the captive may be less flexible in adapting to new risk exposures.
- Regulatory and Compliance Risk: If the captive retains too much risk, it might fall out of compliance with regulations, especially if the claims experience exceeds expectations.
The 1 Action You Can Take to Combat Adverse Risk Retention
As a benefit advisor, you play a crucial role in connecting employer clients and their employees with a sustainable, affordable, and transparent benefits plan and insurance financing solution that meets their unique requirements. Introducing disengaged or unprepared employer members to the captive risk pool contributes to the widespread issue of ARR. You can honor the trust employer clients place in you and do your part to combat the spread of ARR by doing your research.
For example, researching the captive insurance programs on the market will lead you to prioritize captives that actively address ARR. Captives, like ClearPoint Health’s, operate by key principles that signify an accountable captive program that solves for ARR. These principles are as follows:
- Insures unmanageable and unpredictable risk.
- Identifies and retains the manageable and predictable opportunities by employer.
- Empowers employers to take action on the addressable and avoidable risk to generate savings for the captive.
- Rewards employers who improve or maintain behavior that is beneficial to the captive.
- Coaches and financially penalizes employers who harm the captive due to no engagement or action on avoidable costs.
Your homework doesn’t end when you find an accountable captive program, such as ClearPoint’s. You should also do your due diligence on the employer clients you recommend for a captive. When assessing captive candidates, it’s helpful to keep in mind that employers that possess the following attributes are more likely to be satisfied in an accountable captive environment and more likely to be considered ‘good risk’.:
- Long-term Vision: The employer has a long-term vision for its employee healthcare strategy, beyond just short-term premium reductions.
- Commitment and Effort: They are willing to invest the necessary efforts and resources to effectively take part in a group Captive.
- Risk Tolerance: The employer is comfortable assuming additional fiscal responsibility associated with self-insurance and the Captive risk layer.
- Capital Investment: They are prepared to commit additional capital to fund and secure the Captive’s initial surplus, typically ranging from 10% to 15% of the first year’s premium.
- Learning and Understanding: Finally, the employer is willing to invest time and resources in understanding captives, their financial implications, and the ongoing commitment involved.
Research To Do? Let ClearPoint Health Be Your Study Buddy
From Watson and Bell to Stabler and Benson, it’s clear that researchers work better in pairs. Partner with ClearPoint Health and trust that we are thoroughly vetting our captive employer members and the network of third-party administrators (TPAs), pharmacy benefit managers (PBMs), and clinical point solutions they interact with, leading to better outcomes for your employer clients and their employees. Contact us today, so we can get started.
