One excellent use of a property and casualty captive insurance company for one of our clients has been to underwrite a larger deductible on employee health insurance. This has proven to be a win-win for both the employee and the employer in terms of reducing health insurance costs.
With encouragement from the federal government, health plan deductibles have risen significantly over the last few years. Deductibles of $1000 - $3000 per person are now common. The days of $250 or $500 deductibles are a thing of the past.
The burden of high deductible plans has been mitigated somewhat by the tax advantaged Health Savings Plans now seen in the Internal Revenue Code. The HSA may be combined with an employer contribution to bring the employee costs of high deductible plans more in line with workforce market conditions.
From the standpoint of the employer, raising the deductible often results in significant insurance premium savings that far outweigh the expected losses for the higher deductible.
Example: Acme Manufacturing Co. migrates its workforce from a $1000 per person to a $3000 per person deductible. Let's assume that the employee continues to absorb only the first $1000 in medical expenses per insured, while the employer absorbs the costs between $1000 and $3000 per employee (insuring the balance above $3000).
- The impact of a $3000 deductible plan for the employer is generally a 20% lower cost of medical insurance.
- The cost for Acme to absorb the employees' out-of-pocket expenses between $1000 to $3000 results in an overall net savings on health insurance premiums of 15%.
To lessen the impact on Acme Manufacturing, the captive can provide the company a stop loss for the additional health costs, capping the additional $2000 maximum exposure per employee for the company at, for example, $200 per employee, and paying a premium to the captive for taking on the remaining $1800 in exposure per employee. The savings to the employer for the higher deductible, even when considering the costs of the additional insurance paid to the captive, makes this an especially attractive financial arrangement.
Sample Scenario: Acme Manufacturing Co. had a health insurance plan for 65 lives at an annual cost of $406,000 based upon a $1000 deductible per employee. Acme moved to a $3000 deductible plan for the same 65 lives at an annual cost of $323,000 (an $83,000 reduction in premiums).
Acme was able to realize $63,000 in savings, with as much as $110,000 in tax-free profit remaining in its captive insurance company, as follows:
|Premium Savings||- $83,000 (20%)|
|Historical Loss Expense* (10 x $2000)||- 20,000|
|Net Savings to Employer||- $63,000 (15%)|
The captive insurance company would hopefully recognize a profit based upon the premiums paid to it, reduced by actual losses (e.g., a maximum premium** would equate to 65 lives x $2000/year, or $130,000).
* Generally less than 10% of Acme's insured employees will use the maximum medical deductible, which tracks with expected historical losses of similar companies.
**Actual premium would need to be determined.