The Basics of Self Funding
June 7, 2017
11367s0814
Edt.08.25.14
Daniel R. Meylan
• Insurance Professional Since 1973
• P&C and Benefits Broker
• Agency Owner
• Agency Senior Executive
• Agency Acquisitions and Valuations
• Self Insurance, Captives, RRGs
• Bank Agency Operations
• Husband, Father, Grandfather
The Basics of Self Funding
Key Questions
•
•
•
•
•
•
•
•
•
•
•
What is self funding?
When should self funding be considered?
Principles of self funding.
Who uses self funding?
What type of risks can be self funded?
What is the operational structure of a self-funded program?
What are the types of self-funded programs?
What are the costs associated with a self-funded plan?
What is the process of setting up a self-funded plan?
Small Group level funded health plan.
Sample Cases – Successes & Failures
The Basics of Self Funding
The foundation of self funding:
Self funding or self insurance is ultimately
a function of claims costs and the
predictability of and control
over claims activity.
The Basics of Self Funding
What is self funding?
Self funding is accepting the risk of loss as
part of the operational expenses of the enterprise
and limiting the ultimate exposure to the
enterprise by purchasing some form
of excess insurance.
The Basics of Self Funding
Who engages in self funding?
Most enterprises with 500 or
more full-time employees utilize
self funding as part of their risk
management strategy.
The Basics of Self Funding
Self funding requires:
•
•
•
•
Cash
Claims Data
Management Involvement
Some Level of Insurance Protection
The Basics of Self Funding
Why self funding?
• Less expensive – improves profits
• More control of costs
• Manages unique risks
The Basics of Self Funding
Self funding structure:
• Working layer – claims paid from the revenues and
cash flows of the enterprise
• Excess Layers – Stop Loss or Reinsurance purchased
to protect against catastrophic loss exposure
Excess Layers
Working Layer
Excess
Layers
The Basics of Self Funding
Self funding terminology:
• Loss Fund – claims paid from cash flows of the enterprise
• Specific Stop Loss – insurance protection against
singular catastrophic events – “severity exposure”
• Aggregate Stop Loss – insurance protection against
the cumulative effect of numerous claims – “frequency”
Specific Stop Loss
Loss Fund – Cash Flow
Aggregate
Stop Loss
The Basics of Self Funding
Risks that can be self funded:
•
•
•
•
•
•
•
Workers Compensation
General Liability
Professional Liability
Product Liability
Group Health Insurance
Auto Liability
Environmental Liability
The Basics of Self Funding
Who is a candidate for self funding?
“When the cost of transferring risk
(buying insurance) exceeds the cost
of self insurance it is time to self fund.”
The Basics of Self Funding
Conducting a self funding
feasibility analysis:
1.
2.
3.
4.
5.
6.
7.
8.
Analyze accurate loss data (3-5 years currently valued)
Evaluate the company’s financial resources
Select a self funded structure
Determine the cost-appropriate reinsurance
Determine the cost and structure of a claims administrator
Determine the structure and cost of safety and loss control
Determine regulatory approval cost and process if required
Evaluate final cost against other risk transfer alternatives
The Basics of Self Funding
Types of self-funded plans:
•
•
•
•
•
•
•
•
•
Risk Purchasing Group - RPG
Risk Retention Group – RRG
Retrospectively rated plan
Rent-a-captive
Wholly owned captive
Self Funded WC Program
Self Funded Group Health Program
Level Funded Plans
MEWA – Multi Employer Welfare Arrangement
The Basics of Self Funding
Financial components of a self funded
program (100 pennies in a $1.00)
•
•
•
•
•
•
•
•
•
•
Policy fees
Premium taxes
Reinsurance
Loss control services
Marketing costs
Claims administration
Claims costs
Investment income
Collateral costs
Underwriting profit or (loss)
The Basics of Self Funding
10 financial components of a self-funded program
•
•
•
•
•
•
•
•
•
•
Policy fees – The cost to underwrite issue and administer the policies including
endorsements and billings.
Premium Taxes – Taxes and fees due federal, state and local regulatory authorities and
regulatory compliance costs.
Reinsurance – Coverage purchased from other insurance carriers to defray catastrophic
risk exposures.
Underwriting and Loss control services – Safety training, premises inspections,
on site risk evaluation, analysis of claims activity to predict and prevent future losses.
Marketing Costs – Fees and commissions paid to the distribution system, licensed
agents, brokers and carriers.
Claims administration – The cost of servicing and managing claims activities including
tracking and analyzing of claims history.
Claims Costs – The actual ultimate cost of all claims including litigation and allocated
loss adjustment expense.
Investment Income – Interest earned on funds in excess of expenses and paid claims.
Collateral costs – Costs associated with letters of credit or other financial guarantees.
Underwriting profit or (loss) – (Premiums Paid + Investment Income) –
(Fixed costs + claims and related expenses) = profit or (loss).
The Basics of Self Funding aka
“Level Funding”
Level Funded Small Group Health Plans
1.
2.
3.
4.
5.
An alternative to the ACA cost increases
Lower costs for groups with favorable claims experience
Claims history determines final costs
Maximum employer liability is fixed
Turn-key level-funded plans available for groups with
2 or more covered lives
What is the difference between self
funding and level funding?
Self Funding
• the employers ultimate costs are variable and
unknown and based entirely on the cost of claims
• typical for employers with 100 FTES or more
Level Funding
• the employers ultimate costs are capped and limited to
a specified dollar amount
• Typical Level Funded Plans are limited to 12
monthly payments
• available for groups as small as 2 lives
18
Why Level Funding for small employers
Long Term – it’s the most cost effective way
to finance a group health plan
•
•
•
•
Reduces insurance company profit
Eliminates state insurance premium taxes
Eliminates state benefit mandates
Allows employer to take control of group benefit
plan
Money not spent on claims belongs to the
employer – not the insurance company
May avoid the negative rate impact of ACA
19
Self Insured WC Case Study – Success Story
Client:
Retail Grocers Association – 750 retail stores in 5 states
Type of Program: Wholly Owned Captive
Total Payroll:
$225M
Standard Premium:
$ 19M
Per Store Premium
$ 25,500
Premium Rate
8.5% of payroll
Premiums Paid
$7,344,000
Specific Stop Loss:
$250,000 per claim
Aggregate Stop Loss:
94% of standard premium
Total Incurred Losses:
$3,071,000
Policy Fees
$ 144,000 (1.96%)
Premium Taxes
$ 220,320 (3.00%)
Reinsurance
$ 807,840 (11.00%)
Loss Control
$ 367,200 (5.00%)
Marketing
$ 551,625 (7.51%)
Claims Admin.
$ 388,511 (5.29%)
Incurred Losses
$ 3,071,000 (41.82%)
Investment Income ($ 680,000) (+9.25%) 72 months
Collateral costs
$
25,000 (0.3%)
Total Program Costs $ 4,895,496
(66.66%)
Underwriting Profit $ 2,448,504
(33.34%)
Net Savings per store $
8,502
Self Insured WC Case Study – Unsuccessful Story
Client:
Private Security Firm – 1600 employees in 12 states
Type of Program: Rent-a-Captive
Total Payroll:
$44,000,000
Premium Paid:
$ 7,040,000
Premium Rate
$16.02 per $100 of payroll
Specific Stop Loss: $500,000 per claim
Aggregate Stop Loss:
140% of standard premium
Total Losses:
335
Total Incurred Losses: $6,794,000
Program Costs:
Policy Fees
$ 125,000 (1.96%)
Premium Taxes
$ 422,000 (6.00%)
Reinsurance
$ 1,267,000 (16.00%)
Loss Control
$
281,600 (4.00%)
Marketing
$
352,000 (5.00%)
Claims Admin.
$
440,300 (6.25%)
Incurred Losses
$ 6,794,000 (96.50%) within retention
Investment Income ($ 318,000) (+4.51%) 72 months
Collateral costs
$
113,000 (1.6%)
Total Program Costs
$ 9,476,900 (134.62%)
Underwriting Loss $ (2,448,504) (34.62%)
Final Rate Per $100 of payroll
$21.54 per $100 of payroll
Group Self Funded
Arrangements
MEWA
Multi Employers Welfare Arrangements
A MEWA is a self funded arrangement that
allows multiple small employers to band together
to form a group self funded arrangement that
shares risk across multiple small employers.
MEWA’s are only allowed in 6 states.
Iowa is not one of them
The Basics of Self Funding
MEWA
Multi Employers Welfare Arrangements
Key MEWA features:
• Each employer’s employees are medically underwritten
• Program is not “guaranty issue”
• The MEWA may discriminate by charging higher rates to
less healthy groups and declining unhealthy groups
• MEWA’s are subject to Insurance Dept regulatory oversight
• MEWA’s are ERISA compliant
• MEWA’s are permissible as an alternative to ACA in some
states
The Basics of Self Funding
Final Observations on Self funding
• Self funding is always a risk management alternative
• Self funding is not always prudent
• Self funding requires active management involvement
• Self funding assumes predictable claims experience
• Self funding usually includes risk transfer through
insurance at some level
• Self funding ultimately reduces long term risk
management costs
Thank you!
Question & Answer Session
More questions?
Contact Dan Meylan
913-945-4253
[email protected]
www.alliednational.com
25