MSL captives braced for surging claims
The COVID-19 pandemic has pushed down the number of medical stop loss claims, as hospitals and healthcare providers cancelled all non-essential services during the peak of the crisis, but as the economy reopens the numbers are likely to rebound. Captive International investigates.
Healthcare has always been a hot-button issue, particularly in the US, where costs continue to spiral and politicians remain deeply divided over how to resolve the problem. As the US presidential election looms closer, there is no sign of this changing.
Phillip Giles, managing director at MSL Captive Solutions says: “In the expected absence of significant regulatory reform, healthcare costs, especially driven by in-patient hospitalisations, specialty pharmaceuticals, and just about any infusion-related therapies, will continue to increase at a significant pace.”
The medical stop loss (MSL) market has been very competitive for nearly two decades, notes Giles.
“Unrelenting market pressures have continually pushed for aggressive pricing and terms, while medical costs and an uncertain regulatory environment push in a conflicting direction,” he explains.
“Results across the industry have suffered and the past several years have created a challenging environment, especially for a short-tail line of business, for carriers to achieve an adequate level of profitability,” adds Giles.
He has noticed signs of a systemic MSL market remediation in the past year, as carriers look to ameliorate their results.
“Request for proposal declination rates have been increasing, which means underwriters are becoming more discerning in their risk selection,” Giles observes.
“Technical rates are increasing and there has been a tendency for brokers to keep their renewals in the market longer before binding.”
These factors are indicative of some level of market tightening.
“A widespread market hardening is not expected, but a graduated firming in some segments is expected,” explains Giles.
“The MSL market is likely to stay highly competitive for risks having no claims in their excess layers. Underwriters will push for at least a moderate ‘medical trend’ rate increase for risks having some limited activity within their specific layers, and significant rate increases should be expected for accounts that have not performed well and those with multiple ongoing large claims.”
“The risk held within the MSL captive layers has not been materially impacted by COVID-19-related claims.”
Phillip Giles, MSL Captive Solutions
A new picture
“Captives also allow their parent companies to retain surplus in good years to offset bad years, providing increased stability in stop loss rates."
Rob Bachler, Milliman
This was all broadly true at the start of 2020. Since then, the onset of the COVID-19 pandemic has further complicated the picture.
COVID-19 has laid bare the need for comprehensive medical coverage for all. For medical providers and insurers, however, the pandemic looks set to actually reduce costs—at least in the short term.
“In many cases medical care has been deferred, in the case of elective procedures, while other cases that might have arisen in normal times, such as motor accidents, have been completely eliminated,” says Rob Bachler, principal at Milliman.
“With the mandated public sequestrations during the pandemic, most employer health plans have experienced an enormous drop in total claim costs because most routine, non-emergency, and elective procedures have been cancelled or put on hold,” Giles agrees.
The same trend has caused a decline in revenues for many hospital and healthcare systems, especially with the loss of high-margin procedural billings. Many are hoping to get back on track in the second half of the year.
“Healthcare providers are expecting a scheduling boom towards the end of this year and the healthcare insurance industry, including self-funded plans and group MSL captives, should prepare for a significant increase in claims during the last quarter of this year,” says Giles.
As activity picks up in the second half of the year and into 2021, so too will insurance claims.
Rescheduled appointments that take place in 2021 could increase medical costs for that year beyond what would typically be expected, notes Bachler.
The deferral of services may lead to worse morbidity in some individuals, he adds, resulting in higher costs than would have occurred if care had been provided in 2020.
“Captives owners may reduce funding levels and/or redeploy captive insurance surplus after seeing positive results in 2020 without considering the potential for higher than expected claims in 2021 due to COVID-19,” Bachler warns.
Ken Gumbiner, head of accident and health sales North America at Swiss Re Corporate Solutions, says: “The difference for many captive members is that their claims experience had less volatility than employers of similar size, demographics and location that were self-funded independently.
“Employers that were less severely impacted by COVID-19 helped to balance out the higher experience of members that were more severely impacted. This reduced volatility is a primary benefit of a captive programme.”
While captive programmes have many benefits, employers with 100 to 400 employees tend to see the most value, argues Gumbiner. “The captive provides reduced claims volatility by forming a larger risk pool. The majority of large employers with 1,500 employees or more are self-funded,” he says.
“Larger companies can take more risk and maximise the benefit of cost-containment programme savings such as wellness initiatives.”
Giles emphasises the differences between the healthcare coverage (plan layer) assumed directly by the employer and the MSL layers assumed by the captive and re/insurers.
An MSL captive programme encompasses the benefit plan layer—the employer’s retained MSL risk layer that is held in a captive—and the remaining MSL layer that is transferred to an insurance company.
“The plan layer assumes responsibility for all claims incurred by the participants covered under the plan and is funded by the employer outside the captive,” Giles explains.
“The employer pays the claims incurred by the plan and then seeks MSL reimbursement for any larger claims, above a predefined, specific attachment level from its MSL captive and/or the reinsurer.”
The self-funded plan layers not included within captives have experienced significant impact from COVID-19 as the employer, or plan sponsor, is directly responsible for all claims incurred by the plan.
The degree to which the MSL coverage is impacted, including MSL risk held in a captive, depends on the amount of the specific deductible. “The industry-wide average specific stop-loss deductible across all self-funded plans is approximately $95,000,” says Giles.
“Most self-funded plans, including the smallest members participating in group MSL captives, have specific deductibles above $25,000, which is well above the total treatment cost of most COVID-19 claims,” he says.
“While many employers participating in MSL captives have seen some increased claims within the plan layer, the risk held within the MSL captive layers has not been materially impacted by COVID-19-related claims.”
The rising cost of everything
Mike Meehan, consultant at Milliman, argues that while it may seem intuitive that the greatest impact COVID-19 will have on captives insuring MSL will be related to the cost of healthcare, the more significant impact may in fact be elsewhere.
A captive could potentially have exposure in a number of other casualty lines of business, such as business interruption, workers’ compensation and directors and officers liability, notes Meehan.
“These lines of business may typically be considered to have low correlations, meaning the captive could be considered to have a diversified set of exposures,” he explains.
“However, the pandemic could affect the extent to which these different exposures have been historically diversified.
“These captives could now potentially face an increase in claim activity across several lines of business at the same time.”
Group captives, many of which were put together specifically to maximise diversification for members, could also be hit by increased correlations between traditionally non-correlated lines of coverage, Meehan says, given the pandemic’s impact on a high percentage of organisations.
Meanwhile, Gumbiner worries about future market capacity. “The pandemic has impacted market capacity, not only as it relates to healthcare but also workers’ compensation and other lines of business, including casualty,” he says.
“The reinsurance market capacity may be sufficient as some less profitable lines of business are put into run-off or there may be deployment of capital to support capacity. So, the issue of capacity could become significant for markets that depend on reinsurance or excess coverage in order to continue to offer stop loss products.”
In the longer term, Giles warns, the pandemic will lead to a systemic increase in both healthcare and insurance costs. “We have also been seeing a gradual firming in MSL rates over the past few years and this will accelerate that pricing trend, especially for accounts having lower specific deductibles,” he says.
“The combination will drive more mid-sized employers to self-funding as well as increase the participation in group MSL captives.”
Giles predicts that existing individual self-insurers, especially those with a good performance history, will increase their specific MSL deductibles and their amount of retained risk.
“The use of single-parent captives will also increase as a strategic funding mechanism for MSL coverage by larger employers,” he says.
Bachler says there is no single advantage that makes a captive an attractive option for MSL, but several small advantages, taken together, tend to make them attractive.
Using a captive for MSL can reduce the profit margin, commissions and expenses paid to external stop loss carriers, for example, although in some cases this may be offset by the costs of setting up and maintaining a captive.
Captives also allow their parent companies to retain surplus in good years to offset bad years, providing increased stability in stop loss rates, he says.
“It’s all about optimising control and long-term stability,” says Giles.
“A self-funded employee benefit healthcare programme provides an employer with a much greater ability to deliver a benefit plan that fits the specific demographic profile of its employee population and allows it more effectively to meet its desired employee benefit and human resource objectives,” he explains.
Because MSL is an excess, rather than a primary, coverage, captives will not necessarily benefit directly from the loss control measures that employers can put in place, such as narrow networks, referenced based pricing, bundled delivery and biometric screening. Such measures are essential elements of a self-insured plan, but are unlikely to have much impact on the captive layers.
“Since the captive is participating in the excess layer, greater impact will be derived from initiatives that control large claims,” says Giles. Such measures include developing centres of excellence networks, alternative care delivery and specialty prescription drug management.
“The use of organ transplant carve-out coverage, especially for smaller self-insurers in group captives, can also be a good cost reduction strategy,” adds Giles.
“The frequency of large, potentially catastrophic, claims has increased tremendously over the past few years and implementing programmes to contain and control the larger cost claims is essential to the success of an MSL captive.”
Because self-funded employers tend to have greater control over their medical plans, they also have greater opportunities to implement new technology that can reduce healthcare costs, adds Bachler.
“However, formation or involvement of a captive is not going to be a driving force behind implementation of these technologies,” he says.
MSL as part of a broader offering
Meehan observes an increased number of captives providing MSL coverage in recent years, and agrees the trend will continue. “Given the ability to customise health plans, and a focus on employee wellness programmes, insuring MSL through a captive continues to be an attractive option,” he says.
He believes that, despite lines of business becoming more highly correlated in response to COVID-19, it will remain an attractive option for multiline captives looking to diversify.
“For established captives, adding MSL is a way to leverage the captive’s financial strength and diversify the book of business,” says Meehan.
This does not mean that a surge of captives dedicated to writing MSL is likely, says Bachler.
“In many cases, the benefits generated by a single owner captive focused on healthcare do not justify the hard and soft costs,” he argues.
He does predict an increase in the number of healthcare captives created by reinsurers, brokers, third-party administrators, and stop loss carriers, allowing smaller employers to participate through a cell captive or similar structure.
“For large employers, adding MSL to an existing P&C single parent captive can provide several advantages in the way of risk portfolio diversification, risk funding, reserve establishment, and increased efficiencies relative to the use and deployment of surplus,” agrees Giles.
Participating in a group MSL captive can help smaller and mid-sized self-insured employers diffuse risk that many would struggle to absorb on their own as independent self-insurers, adds Giles.
“For both group and single parent MSL captives, the most significant advantage is distancing self-funded employers from an over-dependency on traditional insurance structures and the related market volatility,” says Giles.
He likens the coming market conditions to a “looming perfect storm”, which provides optimal conditions for group and single-parent MSL captives.
“Properly structured MSL captives have proved they can deliver more consistent rate stability and overall cost reduction in comparison to the traditional MSL market results,” Giles says.
“My expectation is that the MSL captive market will continue to expand at a robust pace.”