Why employee benefits captives are adding medical stop loss

As healthcare costs escalate and employee needs evolve, more employers of all sizes have moved to customize and self-fund their employee benefits coverage. Self-funding often is done by forming a captive, which is essentially a separate company that is set up to act as a direct insurer or reinsurer for the parent company or companies. Employee benefits captives increasingly include medical stop loss coverage to help protect companies’ financial health in an era of high-dollar catastrophic medical claims.

As more companies put medical stop loss coverage in their captives, many realize the benefits exceed their expectations. To shed light on how and why, we talked with two leaders from Zurich North America and two leaders from companies Zurich works with to offer industry-leading captive services. Throughout this article, the following four leaders explain the increasing value of employee benefit captives that include medical stop loss:

• Adriana Scherzinger, Head of Alternative Risk Solutions for Zurich North America
• Edward J. Tyburski, Head of Specialty Health for Zurich North America
• Prabal Lakhanpal, Senior Vice President of Spring Group, an alternative risk and actuarial consultancy
• Phillip Giles, Managing Director of MSL Captive Solutions

We start by looking at what is driving the growth of medical stop loss (MSL) coverage in captives.

An upward trend in high-cost claims

High-cost medical claims have become a top concern for employers over the past decade. Since 2016, the number of health plan members with claims of $3 million or more has doubled, according to a 2023 report from the National Alliance of Healthcare Purchaser Coalitions.¹  Just 1.2% of all health plan members are high-cost claimants, but they make up one-third of total health care spending, according to the report.

Against this backdrop, the medical stop loss market has grown, reaching an estimated $26 billion in 2021.² Stop loss insurance is purchased by employers who self-fund their employee benefit plans, which is a growing number: Approximately 65% of covered workers in the U.S. were in a self-funded health plan in 2022³. But many of these companies do not want to assume 100% liability for catastrophic, unpredictable medical losses that may arise. Under a stop loss policy, the insurance provider becomes liable for losses above a deductible set in the policy.

“Even a single large medical claim in the millions of dollars can have significant impact on an employer’s financial picture,” Scherzinger said.

Medical stop loss coverage is available in the traditional insurance market, but putting it in a captive structure can provide additional advantages, including greater protection from rate volatility.

“Also, many larger employers already have single-parent captives to mitigate commercial market volatility in other areas,” Scherzinger said. “Because MSL is a short-tail line, where claims are usually known and settled relatively quickly, adding it to the captive can help with risk diversification in their captive portfolio.”

A recent Spring survey found that 42% of employers that have stop-loss coverage have it within a captive.⁴

“As just one example of the growing interest, our team at Zurich has helped several companies launch medical stop loss captives in a relatively short timeframe,” Tyburski said. “We expect the momentum to continue to increase.”

The advantages of medical stop loss captives

A desire to manage costs often motivates companies to put employee benefits and medical stop loss in a captive structure. But they soon discover added value, Lakhanpal said.

“Recently there has been a fundamental shift where companies aren’t looking at medical stop loss in a captive as merely a funding vehicle that lowers stop-loss costs,” Lakhanpal said. “They’re really starting to view captives as a platform to better manage their healthcare spend. In addition to quantitative advantages, there are a lot of qualitative advantages when you fund risk through a captive versus buying something off the shelf.”

Single-parent captives are typical for larger companies with 1,000 or more employees, while medium firms with 50 to 1,000 employees and even smaller businesses typically are in a group captive, which allows members to pool their resources and their risks.  One advantage of writing medical stop loss and employee benefits in captives is that this gives the employer ready access to their own aggregate health plan data, which expands their ability to proactively make adjustments based on the data they see about their own employee population.

“With the advent of data analytics, there is a lot more focus on better understanding of the drivers of claim costs as well as influencers of claim costs,” Lakhanpal said. “If you can find a roadmap to impact the actual claims, be it through plan design, point solutions, co-pays, specialty prescription drug management or other avenues, there is an argument to be made that you can benefit the wellbeing of your employee population as well as your bottom line.”

Another benefit of putting employee benefits-related coverage in a captive is that it brings the risk manager’s perspective to the employee benefits conversation. “That is something that may not have happened previously in many organizations,” Lakhanpal said.

Giles highlights three more key areas where such captives can provide advantages:

• Cash-flow management: With traditional coverage, an insurance carrier keeps the premiums paid, even when the company’s claims are less than projected. A captive lets the members capture the profit when risks are managed well and losses are lower than predicted. In addition, members also accrue investment income on premium reserves. This advantage can grow as surplus increases, further strengthening the company’s ability to respond to changing market conditions and workforce risks.
• Coverage control and flexibility: Every company is unique. A captive accommodates those differences by allowing a business to customize its coverages to reflect their workforce profile. Traditional carriers, by contrast, may exclude coverages that exist in a self-funded company’s health plan, or exclude specific individuals with significant ongoing medical conditions. A captive can enable a company to help maintain consistency of coverage for its employees.
• Potential improvements in results: “Medical stop loss captives have tended to have better outcomes on loss ratios and renewals than traditional stop loss outside of captives,” Giles said. “Parent companies are self-insuring a significant share of their risk and are motivated to manage it well.”

Another trend: Middle market companies

Midsize and smaller companies are increasingly looking at captives for medical stop loss coverage. One reason is that obtaining cost-effective coverage outside of a group captive can present challenges.

If the risk isn’t spread across multiple companies, a firm with a smaller workforce can’t share the risk. Similarly, the company may not have the deep financial resources needed to pay certain types of claims, often for individuals with significant ongoing medical conditions that may require a higher specific deductible or even be excluded from stop loss coverage altogether (aka “lasering”). If the company doesn’t have the reserves for these types of claims, these smaller employers often take lower specific deductibles, which makes them more vulnerable to cyclical market volatility in insurance rates and pricing.

Putting medical stop loss in a group or single parent captive can reduce susceptibility to traditional insurance market volatility and help avoid year-to-year rate and pricing spikes. For a group captive, members can benefit from sharing their risks. Say a group captive has 10 member companies, each with 100 employee lives. The risk is now spread across 1,000, not 100. Distributing that risk can help provide coverage pricing, terms and conditions that benefit the collective members.

Is a captive structure right for your business?

Putting employee benefits and medical stop loss in a captive isn’t the right choice for every business. While captives can enable greater customization of benefit plans and possible cost savings, they also come with additional capital requirements, risk management responsibilities and regulatory compliance issues. They may also limit a company’s market access and exit strategies.

“We encourage companies considering captives to carefully evaluate the pros and cons and seek expert guidance to make an informed decision that suits their unique needs,” Scherzinger said. “Talking with a carrier that offers holistic risk transfer solutions can help them in this evaluation.”

It’s worth noting that a captive doesn’t necessarily change the nature or pricing of a risk, including stop loss. It only adjusts who holds the risk. In addition, using a captive may require a different mindset. A captive shouldn’t be viewed as just a way to save money on claims, but rather as an important component of a broader strategy for reducing overall cost and improving delivery of benefits to employees. Success in a group captive, specifically, depends on the engagement levels of all its members.

Along with the many advantages of putting medical stop loss in a captive, there are variables and nuances to weigh. Working with a holistic risk management solutions provider such as Zurich — a leader in the captives space for over 30 years — can help you formulate the risk- and cost-management strategies that work best for your business.

Learn more about Captive Insurance here.

1. National Alliance of Healthcare Purchaser Coalitions. “Rethinking How Employers Address High Cost Claims.” 10 May 2023.
2. AM Best. “More Self-Insured Plans Drive Stop-Loss Segment Growth.”  28 April 2023.
3. 2022 Employer Health Benefits Survey. Kaiser Family Foundation (KFF). 27 October 2022.
4. Harrison, Luke. “Hard market and healthcare landscape driving MSL captives.” Captive Intelligence. 23 March 2023.