Keys to Stop Loss Captive Success: How much premium should you cede to your stop loss captive?

Stop loss captives continue to grow in popularity within the self-funded community. They have proven to be an excellent way for employers to lower their health care costs long term, as well as helping producers to hold on to their top clients.

The structure of a stop loss captive is of the utmost importance. The main component of this structure is the size of the shared risk captive layer - the amount of any one claim for which the employers in the captive are responsible. The size of this layer directly correlates to the percentage of overall premium that is ceded into the captive.

It is often said “the more premium you put into a captive, the more profit you can get back”. This is technically true, although it is important to remember that the more premium you put into a captive, the more RISK you place into the captive as well. Determining the correct risk layer for a stop loss captive is one of our strengths.

If too much premium/risk is in the captive layer, it opens up the captive to a greater exposure of large shock loss claims that are difficult to manage. For example, if employers cede 70% of the premium into the captive with a $200,000 layer, the captive is only on the risk for 20% of a $1M claim. However, if you bump that shared risk layer to $500,000, then the employers cede 90% of the premium into the captive, which doesn’t increase the potential return significantly. But now the captive is on the risk for 50% of that $1M claim, taking a disproportionate amount of premium out of the potential return.

Over the last decade, the number of $1M+ claims have increased dramatically, far outpacing the increase in the number of covered lives. Reinsurance is an important element within a stop loss captive and letting the stop loss carrier cover more of the less likely but far more dangerous high end risk is one key to the success of a stop loss captive.

TMHCC underwrites each member group within a stop loss captive with the goal of returning an appropriate profit level while achieving low fixed cost increases year after year. Presenting a client with a large profit return check is certainly invigorating – but our objective is to price the risk appropriately so the employer doesn’t pay an inflated premium throughout the year. Establishing the proper captive risk layer reduces the volatility to each member group and provides an environment to foster a preferred risk pool.

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