A document discusses the evolving role of captives within the changing healthcare environment. It notes rising healthcare costs and the growth of accountable care organizations (ACOs) and self-insurance. Captives are increasingly being used to manage ACO and employee healthcare risks. Case studies show how group captives can generate savings for employers by pooling stop-loss insurance and improving risk management. Forming a successful captive requires thorough planning and establishing sound fundamentals.

1. Proprietary and Confidential
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The Evolving Role of Captives:
Within the New Health Care Reality
The Symposium on Captive Insurance in Connecticut
October 2, 2013

2. 2
Content
 Current State
 The Healthcare Environment is Ripe for Change
 Captives 201
 Creation of a Captive
 Case Studies

3. 3
Current State

4. 4
Healthcare Cost Escalation
Average Annual Premiums for Single and Family Coverage, 1999-2012
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012.
* Estimate is statistically different from estimate for the previous year shown (p<.05).
$15,745
$15,073
$13,770
$13,375
$12,680
$12,106
$11,480
$10,880
$9,950
$9,068
$8,003
$7,061
$6,438
$5,615
$5,429
$5,049
$4,824
$4,704
$4,479
$4,242
$4,024
$3,695
$3,383
$3,083
$2,689
$2,471
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Single Coverage
Family Coverage

5. 5
The Affordable Care Act and ACOs
 Established in 2010 to:
 Promote accountability for patient population
 Encourage investment in infrastructure
 Increase quality and efficiency of service delivery through
redesigned care processes
 Coordinate services under Medicare part A and B
 Rewards ACOs if their overall costs per registered patient
are less than average Medicare beneficiary in geographic
area in a given year
Value Based versus Volume Based Purchasing Model
Goals: Better Health, Lower Costs, Outcomes Based
Shared Savings

6. 6
ACOs and Captives
 Many looking at ACO risk as part of captive programs
 Allow providers to share in cost savings generated by ACO’s
per-capita costs limit
― Captive would also be responsible for equitable distribution of
savings to ACO’s providers
― Captive stop loss for providers
 Help manage the financial risk like the medical malpractice
risk exposure by providing collaboration in defending
medical malpractice allegations
 Provide controls to help reduce medical error and support
single focus
Increasing use of captives to manage risk!
Starting with Employee Population

7. 7
A Trend Toward Self-Insurance
 Control medical cost inflation
 Avoid Impacts of ACA
additional taxes and fees:
Health Insurance Industry Fee
of 2-2.5% in 2014 and 4% in
2015 on fully-insured groups
“…groups between 51 and 100
employees are more likely to self-
fund in greater numbers when they
become subject to the small group
market reform rules in 2016”
RWJ - Factors Affecting Self-Funding by Small Employers; April 2013
“82 percent of employers have experienced a growing level of interest in self-
funding their group health insurance plans over the past 12 months, 32 percent
stating that interest has increased ‘significantly’”
Munich RE: Business Wire, April 15, 2013
52%
54% 54%
55% 55% 55%
57%
59%
60% 60%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Growth of Self-funded Plans
(All Employers)
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2012.

8. 8
Stop Loss in a Captive
Captive
Reinsurer
The captive provides a secure way to self insure
health risks
The captive protects itself from excess claims by
buying cover from an outside reinsurer for individual
claims and total claims that could exceed 125% of
expected
The captive holds
reserves for the employer
to pay individual claims
over each member’s
retained risk SIR
125% of Expected Claims
Employer Self Insured
Retention
(SIR) Level
Individual Claims
AggregateClaims
$250,000
Employer retains some
risk to reduce their
overall costs

9. 9
The Healthcare Environment is Ripe
for Change

10. 10
Reasons Captives are on the Rise
 Growth of employee benefits captive a result of:
 Insurance needs
 Health care reform and other legislative changes
 Business, financial and tax considerations
 Lack of confidence in traditional insurance companies
 Increase in specialist consultants with turnkey solutions
 Brokers see captives as a way of retaining clients and
increasing margins by participating in the risk
 More domiciles with more flexible captive legislation
Market pressures will continue to force employers of all sizes to
search for creative alternatives to traditional insurance products.

11. 11
Trends in Captive Use for Benefits
 New captive formations and expansion of
existing captives
 Greater domicile choice
 Increased funding of unrelated / 3rd party risk
 Truly unrelated
 Employee benefits a major investment for many
companies
 Post-retirement costs in Europe and US are
becoming critical issues where captives are a solution
 Pensions
 Retiree medical
 Stop loss
 Expanded rent-a-captive or segregated cell captive use
 Employee benefits are now a major investment for many companies
 Companies are now seriously looking at captives as a funding vehicle for
benefits as blue chip organizations take the lead

12. 12
Then vs. Now: What has changed?
Captives were rarely used:
 Perceived obstacles
 Reinsurance restrictions
 Territorial restrictions, (i.e. US
only)
 Relatively few employee benefits
reinsured by captives
 Limited HR familiarity with captives
 Insurer reluctance
 Alleged marginal economics
 More people involved:
 HR, Finance and Risk agendas
 Everyone knows about it
 Consolidation of risk financing
 Network restructuring and changes
not aligned with growing market
 Viewed as the next step in cost savings
and control
 Active management increasing:
 Communications
 Formal guidelines
 Annual review and changes
 Quarterly claims management
What does this mean?
Captives represent an emerging growth
area!
Ten Years Ago Now

13. 13
 Case for self insurance is stronger
 Generally, stop loss coverage allows:
― More flexibility of plan design (ERISA vs. state laws)
― Control medical cost inflation
― Access to data not available with fully insured plans which
translates into the ability to make targeted changes
 PPACA provides even more incentives:
― Avoid Impacts of ACA additional taxes and fees
Consider how your risk pool may change due to PPACA. Fully insured groups need
to spread costs.
The Environment is Ripe for Change

14. 14
Captives 201

15. 15
Captives are Generally Established to Insure or
Reinsure Risk
Direct Insurance
Parent
Captive
Parent pays
premiums to
captive
Captive insures parent
exposure and pays
claims
Reinsurance
Parent
Captive
Parent pays
premiums to the
front
Front insures the captive’s
parent exposure and pays
out claims
Insurance Company
The front reinsures
the program with the
captive
The captive pays
fronting fees and
claims
Structure is important. Stop loss
within a captive is not first dollar
coverage.

16. 16
Types of Captives
 Single Parent (Pure)
 Group
 Risk Retention Groups
 Association
 Agency (Broker Owned Captive)
 Rent-a-captive or cell facilities

17. 17
Who Should Consider a Captive?
Companies with. . .
 Good risk management
 Long term commitment
 Financially sound
 Driven by an interest in
financing assumed risk
positions
 Reasonably predictable
insurance risk
Should not consider, if . . .
 Poor risk management /
high loss ratios
 Short term outlook or
price driven
 Financially weak
 Highly volatile or
catastrophic exposures
without the support of
stable lines

18. 18
U.S. Employee Benefit Offerings
Retirement Health Security Time Off
Voluntary
Vacation
Financial
ProductsHolidaySTD1
Drugs
Defined
Contribution
Sick Leave
Mortgages
Investment Funds
Fringe
Training,
Education
Assistance
Transportation
FSA3
Legal, Financial
Planning
Dental
Other Leave
Health & Welfare
Pension

Post-Ret Life
Post-Ret
Medical

Medical
(Stop Loss)
 Life Ins. 
LTD2 
Workers’
Compensation

Auto/homeowners
Insurance

Life
Long Term
Care

1 Short Term Disability
2 Long Term Disability
3 Flexible Spending Accounts
4 Employee Assistance Programs
(mental health, legal assistance, etc.)
Multinational Pooling, Expatriate Global Assistance

Prevention,
Disease
Mgmt







Critical Illness
EAP
4, Work/Life
Executive Benefits
Typical Non-ERISA
Typical ERISA Plans




 = Typical Captive Programs

19. 19
Employee Benefit Cost Savings Using Captives
Program Estimated Savings* Frictional Costs
Active medical stop loss 10% - 12% Cost of stop loss
Term life insurance 10% - 15% Commercial insurance
Retiree medical 3% - 15%
Accumulated Post-Retirement Benefit
Obligation
Long-term disability 15% - 25%
Commercial insurance
On self-insurance, accelerated deduction of
claims cost and tax effective investment
accumulation on reserves
Multinational pooling 10% - 15% Commercial insurance
Executive benefits –
Deferred compensation
COLI
Split dollar replacement
10 + %
Net cost resulting in higher yield on
investments
* These are typical savings that our clients have experienced in the past; actual performance may vary
Other advantages are similar to property/casualty captive funding e.g., broader
coverage, stability against market fluctuations, improved service, direct access to
reinsurers, and increased control

20. 20
Reinsurance
(Stop-Loss)
LOSS FUNDS
Retained by Captive
Expected Paid Loss
Retained by Business Unit
Expected
Loss
$ Max Determined
Paid to
Reinsurer
Risk Transfer for
Aggregate Loss
Protection
Loss Funding -
good loss
experience stays
with captive,
PREMIUMS
Loss Funds
into
Captive
Long-Term Strategies:
1. Grow LOSS FUNDS by retaining and managing more risk in the captive, lessen
dependency on other insurance over-time
2. Accrue value in the captive
Operating
Costs
How Stop Loss Captives Work
How Losses Are Paid OutWhere Premium Goes
Loss
Funding
Expected losses paid by
Captive
DeductibleLoss Fund
for SI Layer

21. 21
Why are Organizations Interested in Stop-Loss
Captives?
 Existing P&C captives and can be extended to
other employee benefits
 Could improve tax efficiency of existing
captives
 May be used when multiple employer
welfare arrangement (MEWAs) and other
group stop loss structures are prohibited or
require more capitalization
 Allows heterogeneous entities or smaller
organizations to pool coverage
 The costs of forming a captive are able to be
spread out among all of the participants
 The risk per participant is lower
 New lower cost captive structures plus
current approval precedents make access
easier
Medical stop-loss
captives allow self-
funded employers to
pool excess medical
claim costs with other
companies to facilitate the
purchase of stop loss
coverage with higher
attachment points, thus
effectively lowering
the cost of coverage
and effectively
controlling their health
cost expenditure

22. 22
Key Considerations When Forming a Captive
Captive Type
• Pure
• Group
• Fronted
• Direct
• Cell
• Rental
Captive Legal
Structure
• Stock
• Mutual
• Reciprocal
Domicile
• Capital and
Surplus
• Financial ratios
• Minimum
attachment points
Tax Issues
• Deductible
premiums
• Insurance
accounting
• Deposit
accounting
• Accelerated
deduction
Regulatory
Compliance
• Financial metrics
• Record keeping
 Human Resources
 Same carriers and networks
 Access to transparent data
 Expert support for health
data/trends, health reform and
legal issues
 Employees
 No noticeable change
 Minor and seamless transition
of services
 Improved employee support
services
Staff Impact

23. 23
Control
• Premium
volatility reduced
via claims pooling
and large scale
PROGRAM STRUCTURE
• 5-8 custom health plans
• Best in class health management
and wellness
• 1-2 carriers
• Full data analysis for
management/benchmarking
• Active member involvement in
decision-making and design
One Central
Point of Contact
• Enrollment
• Billing
• Employee interface
• Employer data
Transparency
• Financial and
performance data
• No hidden costs
Buying Power
• Creates cost
savings that
increase as the
group expands
Flexibility
• Select plans
• Select employee
contribution
• Maintain existing
broker relationships
Choice
• Members can
choose to self
insure some of
their own risk to
save cost
Group Captive Program Development

24. 24
Health & Productivity Management
Funding
Group Captive Program Development
Founder
Employer
Group
Additional
Participants
Health
Insurance
Funding
Improved Risk
Mgmt Bulk
Purchasing
Other Risks
– Life
Disability
Retiree
Health
Pensions
Life
Performance
Measurement
Healthier, More Productive Employees
Improved Benefits Value and Cost Management
ROI Measurement
Continuous Improvement
Tighter Controls and Risk Management
Health
Management
Initiatives
Wider
Health and
Wellness
Initiatives
In House
Primary
Care
Health and
Disability

25. 25
Creation of a Captive

26. 26
The Fundamentals must be Sound
Effective
Captive
Program
Understanding
of Risk
Profitability
over Time
A Sound
Business Plan
Access to the
Right Insurance
Markets
Good Analytics
Expert
Management

27. 27
How to Establish a Captive
 Conduct a feasibility study
 Loss history
 Risk/reward discussion (potential benefits)
 Minimums: solvency, capital requirements, premiums
 Ownership options
 Financial analysis
 Legal: DOL requirements, taxation, and incorporation
 Actuarial review
 Select partners
 Incorporation
 Captive licensure
 Capitalization
 Reinsurance / insurance contracts
 Service provider agreements
 Seek DOL approval if necessary; but it may not be necessary

28. 28
Case Studies

29. 29
Case Study 1: Group Captive Feasibility Study
• 25 employers with approximately 9,000 total employees spend $110M per
annum on health insurance
Organizations
• By funding their stop loss health insurance through a captive, the group will
conservatively save over $6M
Situation
• 5 year net present value savings exceed $30M
• Additional savings are anticipated from:
• Better health management
• Reduced reinsurance costs
• Further savings on administration
Anticipated Results

30. 30
Case Study 1: Group Financial Projection
Representative
Sample
25 employers
9,800 employees
Full population
60 employers
100,000 employees
Spending $110M
on health insurance
Spending $1.2B
Conservative 2011
savings 4% - 9%
depending on group
Savings of $180M -
$250M per year -
improved with
volume
Projection
Impact of
Captive
Impact of
Captive
Results are pending first year review in 2014!

31. 31
Case Study 2: Pure Captive
• Global food distributor with 60,000+ employees
Organization
• Offshore property/casualty captive already in place
• Opportunity to fund its otherwise unfunded liability
• Interested in integrating disability and workers’ compensation
• Leveraged current stop loss program to incorporate additional premium volume;
considered direct and fronting placement
Situation
• Reduced reinsurance costs
• Further savings on administration
• Capture investment income
Anticipated Results

32. 32
Case Study 2: Results
Line of Coverage Captive Savings ($$)
Retiree Medical 22% of the liability over ten years
Long Term Disability Stop Loss 21% of the existing premium
Medical, Dental and Vision Stop Loss 8% of the existing premiums

33. 33
Questions and Contact Information
Karin Landry
Partner
Spring Consulting Group, LLC
Phone: 617-589-0930
Karin.Landry@springgroup.com
Teri Weber
Partner and Senior Consultant
Spring Consulting Group, LLC
Phone: 617-818-3148
Teri.Weber@springgroup.com