CAPTIVATE YOUR EMPLOYEE BENEFITSHow Captives Drive Performance

Shawn Lanter | Director, Berkley Accident + Health

48

YEARS in operation

Berkley Accident and Health is a member of W. R. Berkley Corporation:

5where WRBC operates worldwide

7.1

in revenues in 2014

$BILLION

Source: W. R. Berkley Corporation year-end 2014 results. Fortune 500 property/ casualty ranking and #409 overall ranking, www.Money.CNN.com, June 2014. Best Managed Companies, ww.Forbes.com, 2007. Market capitalization as of May 20, 2015.

6.2

Market capitalization $ BILLION

14

LARGEST property/casualty insurance group

th

Best Managed Companies in AmericaCONTINENTS

BERKLEY ACCIDENT AND HEALTH IS A MEMBER OF W.R. BERKLEY CORPORATION:

W. R. BERKLEY INSURANCE GROUP 49 OPERATING UNITS WORLDWIDE

Insurance is underwritten by Berkley Life and Health Insurance Company, known for its financial stability:

BERKLEY ACCIDENT AND HEALTH

Source: www.ambest.com and www.wardinc.com, 2014.

Rated A+ (Superior) by A. M. Best (second-highest rating out of fifteen) A+Named a Ward’s 50 top-performing insurer for safety and consistency

CAPTIVATE ONLOOKERSAGENDA

1.Group Captives – What, Why, How, Who

2.The Market Climate

3.Berkley’s Group Captive Program

4.Financial Scenarios

5.Other Considerations

WHAT IS A CAPTIVE?

A Captive is a medium for taking risk.

It can be formed by a single company Or multiple companies

Single Parent Captive Group Captive

WHAT IS A GROUP CAPTIVE?

A Group Captive can be made up of companies in the same industry or different:

Same industry Different industries, sizes,or regions

Closed membership Open membership(Homogeneous) (Heterogeneous)

WHY DO GROUP CAPTIVES EXIST?

Group Captives exist to give employers: Control Lower overhead/inefficiency from insurance carriers Long-term stability Capacity Data transparency Collaboration/best practices

WHAT IS BERKLEY’S GROUP CAPTIVE?

Group stop-loss captives combine three strategies:

EmCap

Self-funded health plan

Group captive

structure

Collaborative health risk managemen

t

CAPTIVE MISCONCEPTIONS

• “Employee benefits captives are only for jumbo‐sized employers”• “All captive employee benefit programs must be approved by the

Department of Labor (DOL)”• “There’s just no way that Risk/Finance and HR will ever see eye‐

to‐eye regarding the advantages of a captive employee benefit program”• “The whole process is just too complex for us to deal with”• “We could get permanently locked into a program we’re just not

happy with”

Self-Funding w/Stop-

loss

Level Funding

Group Stop-loss Captive

Stay the Traditional

Course

Drop Coverage

Self-Funding Options to take

Control and Reduce Insurance

Dependency

STAY THE COURSE – FULLY INSURED

Affordable Care Act (ACA) hits fully insured plans the hardest

ACA’s Ten-Year Total Tax Impact = $164 billionSmall Employers +$2,760 single +$6,830 familyLarge Employers +$2,610 single +$7,130 family

ACA’s Tax Sources (in billions)

$102$34

$29 Health Insurance Plans (does not impact

self-funded plans)

Medical Devices

Prescription Drugs

Source: Effects of the PPACA Premium Tax on Small Businesses and Their Employees: An Update, http://www.nfib.com; Estimated Premium Impacts of Annual Fees Assessed on Health Insurance Plans, http://www.ahip.org; based on the ten-year period from 2014-2023; AHIP 2013.

Stay the Traditional

Course

Self-Funding Options to take

Control and Reduce Insurance

DependencySelf-Funding w/Stop-loss

Today, nearly all large companies self-fund their health plans

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

20%

40%

60%

80%

100%

13% 15% 17%13% 10% 10% 13% 13% 12% 12% 15% 16% 13% 15% 16%

60%67%* 66% 66%

72% 73% 75% 78% 77% 77% 77%83%* 82% 81% 83%

Large Firms (200+ workers)

Small Firms (1-199 workers)

Notes: For 2000, the large firm estimate is statistically different from the estimate for the previous year shown (p<.05). In 2006, funding status was not asked of firms with conventional plans, due to a change in the survey questionnaire. Therefore, conventional plan funding status is not included in the averages in this exhibit for 2006. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2013, www.kff.org.

WHO SELF-FUNDS?

PROS OF SELF-FUNDING

Traditional Advantages• Risk is limited with stop-loss reinsurance• Cash flow advantages;

no pre-funding of claims with advantage to employer in favorable claims years

• Data transparency (detailed utilization data) allows employers to identify issues and promote healthier cultures

• Multi-state plan design; benefit flexibility; ease of administration

• Lower fixed costs• No premium tax• No insurance company profits• Lower long-term cost

Additional Advantages Under ACA

• Not required to provide coverage with minimum essential benefits

• Not required to participate in a risk-adjustment system

• Not subject to provisions, such as Medical Loss Ratio requirements and premium increases

WHY DO EMPLOYERS SELF-FUND?

Significant advantages to self-funding• They have the financial leverage to assume risk• They have the size to provide predictability (lower risk premium)• They purchase medical stop loss at a higher retention level

(mitigation/stability) = less dependency on insurance• They can implement best-practice health risk

management strategies (high-performing companies) to bend the cost curve

BENDING THE COST-CURVE

Using self-funding as part of a performance driven strategy to proactively manage your health risk• Impact is huge• Employer health premiums

have increased at a compounded rate of 9% for the last 10 years1

• “High-performing” risk companies have trend at or below 3%2

1Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2013, www.kff.org.2Towers Perrin, annual study of health insurance costs

2013 2014 2015 2016 2017$0

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

$900,000

$1,069,000

$1,270,000

$900,000 $955,000$1,013,000

Average9% trend

High-performing over 5 years

3% trend

STOP-LOSS REINSURANCE

How does Medical Stop Loss insurance work? • Covers catastrophic or unpredictable losses• Protects the self-funded employer’s assets• Individual/Specific Stop Loss

o Protects against high claims from any one individualo Protects against the severity of a single catastrophic claim

• Aggregate Stop Losso Provides a ceiling for overall claims liabilityo Protects against higher-than-expected usage or frequency of claims

from the entire group

CONS OF SELF-FUNDING

• Not good fit for companies with consistently bad claims ongoing (unfavorable loss ratios)• Requires strong balance sheet• Typically 100+ employees• Annual risk 10% - 25% of Expected Claims costs• Cash flow fluctuations• Reserves needed to switch back to fully insured• Requires more senior leadership involvement• Longer term commitment

Challenge: How do you create the large employer advantage for small and midsize companies? • Self-funding provides benefits typically enjoyed only by large

companies: o Controlo Transparency

• Group Captives can provide stability by spreading risk across its members

• Health risk management can lower short- and long-term cost trends:o Opportunity to control costs

WHY DON’T MORE EMPLOYERS SELF-FUND?

ANNUAL CLAIMSLow

High

PRO

BABI

LITY

Low

H

igh

Mid-Size Self-Funded Health Plan

WHY DON’T MORE EMPLOYERS SELF-FUND?

GROUP CAPTIVES MITIGATE VOLATILITY

ANNUAL CLAIMSLow

High

PRO

BABI

LITY

Low

H

igh

Shift expected due to law of large numbers

Self-Funded Health Plan moving into a Group Captive

ANNUAL CLAIMSLow

High

PRO

BABI

LITY

Low

H

igh

Shift expected due to risk management results

Self-Funded Health Plan moving into a Group Captivewith Health Risk Management

GROUP CAPTIVES + HEALTH RISK MANAGEMENT

Self-Funding Options to take

Control and Reduce Insurance

DependencyGroup Stop-loss

Captive

GROUP STOP-LOSS CAPTIVE

Group Captives bring it all together by allowing small employers to act like large employers:

1. Traditional advantages of self-funding2. Additional advantages with ACA3. Best practices for health risk management4. Collaborative financial strength5. Greater scale for predictability6. Buy less Stop Loss insurance (higher deductible)

CAPTIVE OPTIONS

1. Start one from scratch (single or multi-employer)• Considerations / Barriers:

• Time• Resources/Capital

• Creation can be a very costly value proposition. Ballpark to start your own captive from scratch can range from $500K to $750K.

• Regulatory requirements• Captive components and vendor selection

2. Join a existing captive

Domicile Actuary

Tax & Audit

BankingCaptiveManager

Asset Managemen

t

Reinsurance

MemberSpecific Vendors

Advisor

Pre-negotiated

Vendors

STARTING YOUR OWN CAPTIVETypical Captive Components:

JOINING EXISTING CAPTIVE

Segregated Cell Captive Option• Allows participants to create

something unique for its owner members• Industries, geographic location,

demographics, etc.• Join re-created established

captive model • Already Capitalized• Completed regulatory

requirements• Benefits of larger group, and

economies of scale - until critical mass is reached

ExistingStop-Loss Captive

Segregated Stop-loss

Cell

Target employers for a Group Stop Loss Captive: 50-1,000 employees eligible for health benefits Forward-thinking management team Good communication with employees on health care

costs Willing to implement robust health/wellness programs Financially stable and willing to take on a portion

of the risk for their health plan

WHO SHOULD CONSIDER A CAPTIVE?

RISK LAYERS: CLAIMS EXPOSURE/COSTSRetain. Share. Transfer.

Group Captive LayerPremium + Non-Premium Funding (collateral)

Employer 1

(SFR)

Employer 2

(SFR)

Employer 3

(SFR)

Employer 4

(SFR)

Employer 5

(SFR)

Berkley Retained LayerRetained Excess + Captive Aggregate Coverage + Fixed Costs

No risk sharing

Employers pay for claims up to

Stop Loss(Individual or

Aggregate claims)

Employer Layer

Risk shared among members

in captive

Risk assumed by Stop Loss insurer

>$250k individual and captive max

RELATIONSHIP OF PARTIES

*Includes plan, broker, TPA, and risk management strategies

RETAIN

CaptiveAgreement

Stop LossPolicy

ReinsuranceAgreement

SHARE

Group Captive

TRANSFER

EmployerPlan*

BerkleyStop Loss/

Excess

STEPS

1. Self Fund2. Buy Stop Loss Policy3. Join the Group Captive

STEP 1 – SELF-FUND

Each employer:• Chooses to self-fund its employee health benefits• Creates and manages its own self-funded health plan• Commits to a focused and consistent strategy of health risk

management• Pays for claims on behalf of its plan

STEP 2 – BUY STOP LOSS POLICY

Each employer:• Buys a Berkley Stop Loss policy1 with Specific and Aggregate

protection (individually rated; no group rates)• Determines own retention levels

($25k used for example purposes) • Pays premiums to Berkley for their Stop Loss policy• Gets reimbursed by Stop Loss policy for covered claims

above Specific or Aggregate level1Stop Loss policies are underwritten by Berkley Life and Health Insurance Company (“Berkley” or “Berkley Life and Health”)

STEP 3 – JOIN THE GROUP CAPTIVE

• Berkley Life and Health reinsures the layer between $25,000-$250,000 per individual to a captive

• The captive is a reinsurer of Berkley and does not issue policies

• The captive receive premium for the layer from Berkley• Each employer provides collateral to the captive, in case

premiums are insufficient, and pays a fee to cover the captive’s expenses

• Berkley limits the captive’s exposure with a program Aggregate

• Unused captive funds are returned to employers

Retain. Share. Transfer.

FREQUENCY OF CLAIMS

PER

IND

IVID

UAL

BERKLEY LIFE & HEALTH

Individual$25,000

per Individual

MEMBER RETENTION

Aggregate110%-125%

of expected claims

STOP LOSS POLICY STRUCTURE

Risk Layer FundingRetain. Share. Transfer.

BERKLEY LIFE & HEALTH

Individual$25,000 per Individual

MEMBER RETENTION

Aggregate110%-125%

of expected claims

FREQUENCY OF CLAIMS

PER

IND

IVID

UAL

EXPENSES

Individual$25,000

per Individual

MEMBER RETENTION (SFR)

Aggregate110%-125%

of expected claims

Berkley Life & Health retained excess, expenses, TPA

Up to $250k individual

Premium funding

Non-premium funding

(collateral)

GROUP CAPTIVE

LARGE CLAIM EXAMPLE

Employer has a $600,000 claim from a premature birth:

BERKLEY LIFE AND HEALTH Stop Loss policy reimburses $575,000 to the employer

GROUP CAPTIVE reimburses Berkley for $225,000

EMPLOYER funds first $25,000 through its self-funded retention

Sample EmCap Layers vs. Average Results

Self-Funded Reten-

tion70%

Captive Layer 25%

Collat-eral 5%

Expenses 15%

COSTS, RESULTS, AND FINANCIAL SCENARIOS

Sample Account: 200 Lives, Fully Insured, $25K Specific EmCap

ProposalSample Account EmCap Proposal

% of Fully Insured Premium Pie

Insured Premium $2,500,0000 100%

Expenses $375,000 15% FIXED

Self-Funded Retention $1,750,000 70% VARIABLE

Group Captive Retention $625,000 25% VARIABLE

Collateral $125,000 5% VARIABLE

Variable Costs $2,500,000 100%

Projected Minimum $375,000 15%

Projected Maximum $2,875,000 115%

COSTS, RESULTS, AND FINANCIAL SCENARIOS

EmCap Layers

Self-Funded Reten-tion70

%

Captive Layer 25%

Collat-eral 5%

Ex-penses

15%

Berkley EmCap programs are averaging 10-15% BELOW SFR

Berkley EmCap programs are averaging 7-9% CAPTIVE LAYER SURPLUS in 2012

Surplus at Captive Layer = No collateral draw

Past EmCap results are not a predictor of future results. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data shown.

COSTS, RESULTS, AND FINANCIAL SCENARIOS

Sample Results: 200 Lives, Fully Insured, $25K Specific EmCap Proposal

* Past EmCap results are not a predictor of future results. Past performance does not guarantee future results. Current performance may be lower or higher than the performance data shown. **All unused funds are returned to the member.

Sample Account EmCap Proposal 2012 Avg Results*

Expenses $375,000 FIXED $375,000

Self-Funded Retention $1,750,000 85% $1,487,500

Group Captive Retention** $625,000 91% $568,750

Collateral $125,000 0% $0

Total Cost $2,431,250

vs. Insured Premium $2,500,000

EmCap Total Savings $68,750

Potential savings opportunity, plus data, stability, and transparency

COSTS, RESULTS, AND FINANCIAL SCENARIOS

QUESTIONS?

CAPTIVATE ONLOOKERSSUMMARY

Member organizations take control of their costs

Cumulative effect of retention = Long-Term Plan

1. Retain positive variability

2. Spread negative variability

Increased risk tolerance with experience/data

Surplus potential = collateral carryover

CAPTIVATE ONLOOKERSSUMMARY

"Pay Yourself" leveraged trend

Harness group purchasing power

1. TPA/Admin Fees

2. Network Contracts

3. Pharmacy Benefit Manager contracts (PBM)

4. Health risk management services

THANK YOU