By Michael J. Moody, MBA, ARM

Today’s insurance market is full of unknowns. Whether it is the property/casualty or the benefits side of the house, the state of the insurance industry can be summarized as one big question mark. Market forces on both sides of the insurance sector have resulted in a pretty cloudy picture for insurers/reinsurers, agents, brokers and insurance buyers. As a result, plans for 2014 are still in disarray in many organizations.

With rare exceptions, carriers and agents/brokers continue to struggle with the strategic aspects of both their short-term and long-term business plans, thanks in large part to the uncertainties created by the implementation of the Affordable Care Act (ACA). However, there is one segment of the insurance business that is continuing to grow, even in this environment. Continuing a long-term growth pattern is the activity within the self-funded medical benefits arena.

“People sometimes lose sight of the fact that stop loss premium cost is generally a very small portion of the overall cost for a self-funded employer. By far the largest part of the equation is the claims.” —Matt Rhenish Senior Vice President of Strategy and Marketing HM Insurance Group

Self-funding 101
Self-funding employee health benefits over time has become one of the most cost effective approaches to providing for employee health benefits. Since the passage of the Employee Retirement Income Security Act of 1974 (ERISA), most large employers have taken advantage of the benefits of self-funding. Central to these advantages is the flexibility and cost savings available under a self-funded program. It allows the employer to take some of the financial risk, while gaining a number of financial benefits from issues such as state premium taxes, cash flow advantages and protection from adverse loss development in the form of stop loss insurance.

Stop loss coverage is the combination of two segments. The first is known as “specific” coverage and is designed to cover the self-funded program from one large claim from a single individual. The other segment of coverage, the “aggregate,” provides protection for the plan’s total annual losses, should the total losses exceed the annual projection. In essence, the “specific” protects against severity type claims, while the “aggregate” provides protection against the frequency of claims. Most self-funded programs consider the acquisition of a well-designed stop loss program as a critical element to a successful, long-term operation.

Silver lining
As noted above, most experts agree that the current growth in the self-funded market is following a long-term trend that has been occurring since 1974. Initially, it was the large employers that utilized the numerous advantages of self-funding but, more recently, mid-sized employers are also getting involved and today “the market is pretty strong,” notes Matt Rhenish, senior vice president of strategy and marketing, HM Insurance Group. HM is a leading carrier in the stop loss insurance market. As noted above, stop loss coverage is one of the core components to any self-funded benefit programs and is critical for the success of mid-sized employers’ self-funded benefit programs.

Matt Leming, vice president, sales leader, Swiss Re Corporate Solutions, also points to the growth potential of this market. “I think that there is potential there but, as with anything, time will tell.” Leming notes that 2014 is the first full implementation year for the ACA that has been phased in over the past three years. “This is really the ‘kick-off year’ for the complete ACA implementation.” Despite the changes that ACA has made to the health care market, growth in the self-funded market, where Swiss Re Corporate Solutions focuses, has for the most part been unaffected.

The self-funded option has even attracted the attention of smaller employers. Some are banding together to form groups that are made up of stable kinds of employee-based organizations that have a stable employee population and are able to fund the cash flows. However, it is critical that these smaller employers understand the financial aspects and obligations associated with the program.

While the ACA has changed many aspects of the health insurance industry, its effect on self-funded programs has been minimal in comparison, Rhenish says. The most significant area that the ACA has affected is limits as the law requires “unlimited annual and lifetime maximum limits,” says Leming. Previously, he says, “There used to be a limitation on the dollars that would be paid for a claim; but no longer.”

New approach
For the past three or four years, while smaller employers would band together to have a large enough group to make the dynamics of self-funding available to themselves, they continued to seek methods to further reduce their costs. Over the past several years, employers have tried to utilize a Risk Retention Group to assist in resolving the cost issue, with little success. Rhenish points out: “There’s a lot of talk about them but we haven’t seen a lot of action in terms of groups moving into captives.” Certainly, he confirms, “it’s a topic in our industry.” Swiss Re indicates that it is also aware of the use of RRGs; however, Leming believes sales to captives have been pretty limited across the board.

“ACA requires unlimited annual and lifetime maximum limits. Previously there used to be a limitation on the dollars that would be paid for a claim; but no longer.” —Matt Leming Vice President & Sales Leader Swiss Re Corporate Solutions

Even where attempts have been made, Rhenish points out, “if the reason for the RRG is to reduce costs, they are missing the mark. People sometimes lose sight of the fact that stop loss premium cost is generally a very small portion of the overall cost for a self-funded employer. By far the largest part of the equation is the claims.” He thinks that time and money are much better spent trying to find ways to reduce claims costs than looking for ways to reduce the stop loss premiums.

One of the biggest issues for both carriers is education. Leming notes that both the broker/agent and the employer must understand the ins and outs of self-funding. “For me it all comes down to education,” says Leming. “Product knowledge is critical for new brokers and agents. If you’re going to advise employers to do something beyond traditional coverage, then you need to be fully educated in that product.” Both companies place a premium on product knowledge and are available to assist a broker in learning the details regarding their product.

However, the companies take a different approach to product distribution. Leming indicates, “Our approach is made up in large part of wholesale partners.” Rhenish notes that HM Insurance Group deals on a direct basis with the insurance distribution system. “Interested agents and brokers who wish to deal with us can approach our company via our sales staff, and we are always looking for knowledgeable partners.”

Conclusion
Both HM Insurance Group and Swiss Re Corporate Solutions believe that the self-funded health insurance market represents a great opportunity today. The advantages and benefits of the self-funded approach are well known, and many employers are searching for viable solutions to the ACA, further increasing interest. Rhenish puts it this way, “We feel good about the market, and we feel that it is much more positively impacted than most other health care-related markets.” Swiss Re also believes that there is a significant likelihood for stop loss business in today’s marketplace. Leming notes, “Unlike some of the alternative risk transfer options that are available to insurance buyers, there are few barriers to entry for an organization that wishes to implement a self-funded benefit program.”

The key here, however, is education. It is extremely important that brokers and agents that wish to move into this market have an in-depth knowledge. And not just about the stop loss coverage, but the entire self-funding approach. Agents and brokers that take the time to invest in education on this market segment have a real opportunity to differentiate themselves from their competition. Both HM Group and Swiss Re have the expertise to assist with the education side and can also provide a competitive stop loss product.

It’s rare to find market availability of this magnitude and one that has such an upside potential. Agents and brokers would be wise to consider adding self-funding benefits to their strategic plans.