Captives are the fastest-growing alternative funding solution since 2020 and it’s easy to see why. Compared to fully insured employee benefits plans, group captives offer small and midsize businesses (SMBs) large group purchasing power, lower pricing volatility, and greater transparency into claims data. They’re designed for long-term growth and serve as an avenue to medical stop loss for companies that could not otherwise afford it. The list of positives goes on, but benefit advisors should still practice discretion when recommending captive solutions to clients.
As a proponent of captive insurance and the designer of our proprietary, clearly evolved group captive model, ClearPoint Health can confidently say not every employer is built for a captive. Read on for examples of employers who are not a good fit, the attributes you should look for before prescribing a captive, and the reasoning behind this selective approach.
Persona 1: ‘Right Now Ron’ — Employer that lacks a long-term vision.
Right Now Ron manages health insurance as if it’s not a capital expenditure. His company goes from rate to renewal, just focusing on the insurance rate and not the underlying unit cost. Ron fails to realize the difference between being a manager of insurance and a buyer of risk.
| Insurance Buyer | Risk Manager |
| Over indexing on insurance rate versus unit costs | Focuses on the unit rate, not the per employee per month (PEPM) cost |
| Wants to revisit budget once a year during the renewal cycle | Continuously evaluates budget |
| Not interested in root cause analysis | Looks into the source of volatility |
| Believes the fully insured carrier is focused on controlling costs like they are | Knows the carrier benefits from the better deal in a fully insured arrangement |
| Puts too much emphasis on the value of the fully insured network and its discounts | Trusts alternative funding solutions have built-in cost management |
The realization that cost trend, not rate, is the real issue would be the first step on Ron’s path to becoming a true risk manager and a good captive candidate.
Persona 2: ‘Low Effort Lois’ — Employer that is not willing to embrace a capital procurement mindset for health insurance.
This employer does not realize they’re on the so-called annual renewal hamster wheel, managing what is a Top 3 expense for most businesses today from renewal to renewal. Lois’ company needs to invest the time and energy on learning the drivers of its health insurance spend.
Lois may not realize that fully Insured and carrier-based level funded plans are intentionally easy to understand and administer because they are chock full of profit elements for the carrier.
The truth is, passive strategies lead to stagnation. Until Lois realizes the value of a captive solution is worth the commitment, she is not ready to join a captive.
Persona 3: ‘Fearful Fred’ — Employer that is uncomfortable assuming additional fiscal responsibility.
Change is scary, but Fred has not yet realized that it might be necessary to improve the quality and stability of his employee health plan.
Persona 4: ‘Noncommittal Connie’ — Employer that is not prepared to commit additional capital to fund & secure the captive’s initial collateral.
This employer is focused on the short-term and has not taken the time to understand the relevance of captive collateral. Though Connie views it as a hurdle, in reality, captive collateral represents her company’s downside risk in a group captive on an annual basis, and is ~3% of its fully insured equivalent spend.
Connie may not know that many captives offer flexible payment options, such as monthly invoicing, or letters of credit (LOC), which are issued by a commercial bank on behalf of the captive and guarantee payment up to a specific amount. ClearPoint’s captive even accepts collateral in the form of rebates from our proprietary pharmacy benefit manager (PBM), ClearRx.
Captive collateral can present a significant return opportunity based on group captive historical returns. If unused, it is rolled over to the next underwriting year. Even if the employer decides to leave the captive program, it is often returned to them.
Connie is hesitant to commit because she does not view collateral as the asset it is. In a captive, her company wouldn’t be spending more, just spending smarter.
Persona 5: ‘Naïve Nora’ — Employer that’s not willing to invest time & resources in understanding captives.
Nora is too naive to realize the economic interests of fully insured carriers are not aligned with her company’s economic interests. Purpose-built for innovative and progressive benefit advisors, ClearPoint Health makes it easy to educate clients like Nora on new, innovative and effective group health solutions. Through education, Nora might come to realize that with ClearPoint Health, the onboarding process is smooth and the value of captive membership is worth the time and resources it takes to understand captives.
Assessment Checklist: Which Clients are Ready for a Group Captive?
As a benefit advisor, you have a responsibility to link employer clients and their employees with a benefits plan that meets their unique needs. Before you initiate a conversation with your client about possibly joining a group captive, review the checklist below to determine if they are a good fit.
- Long-term Vision: Does the client have a long-term vision for its employee healthcare strategy, beyond short-term premium reductions?
- Commitment and Effort: Is the client willing to invest the necessary efforts and resources to effectively take part in a group captive?
- Risk Tolerance: Are they comfortable assuming additional fiscal responsibility associated with self-insurance and the captive risk layer?
- Capital Investment: Are they 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: Is the client willing to invest time and resources in understanding captives, their financial implications, and the ongoing commitment involved?
It’s crucial you assess clients’ needs, goals and employee benefits philosophy, so you can make plan recommendations that result in their satisfaction, promote positive health outcomes among the employee population, and keep disengaged or unprepared employer members out of the captive risk pool.
ClearPoint Health provides advisors the tools to become an alternative funding expert and the confidence to make game-changing recommendations. Contact us to learn how we can help you.
