All Resources
Published April 08, 2024

How Do Employee Benefits Captives Work?

group of employees at a table discussing metrics

Explaining Captives for Employee Benefits

Captive insurance is a form of alternative risk transfer in which a company, or group of companies, form an insurance company in order to provide coverage for their own risks instead of transferring them to a third-party, traditional insurer.

In a group benefits captive, employers retain the risk of providing certain benefits for employees such as health insurance, life insurance, disability insurance and retirement plans. Instead of paying premium dollars to a traditional insurance carrier, they contribute money into a fund which is used to pay out claims. This often lowers costs, offers more flexibility in benefits offerings and offers access to risk management and decision-making tools that organizations otherwise may not have access to.

Do I Have to Start My Own Captive?

Incorporating your own, single-parent captive insurance company (formed by one company for the sole purpose of retaining the risks of that organization, its subsidiaries and affiliated companies) is an option, and one that many large companies have already taken advantage of.

For mid-sized companies, a group captive is often a better fit. It allows them access to the benefits of captive ownership without having to fulfill the logistical challenges of running an insurance company. They also are able to diversify their risks by pooling similar risks with other trusted organizations that have similarly attractive loss histories.

There are existing group captives that welcome new members, as long as they are able to fulfill their requirements. The criteria depends on the captive, but generally speaking, they are looking for organizations with a good loss history and a similar commitment to risk management and claims management.

What’s the Difference Between a Captive and Self-Insuring?

The main difference is in structure, and the way that each option is organized and regulated.

When an organization self-insures, it is contributing money into a savings account which is used to pay out claims.

An employee benefits captive is a formally-licensed insurance company, formed to pay out claims for its member organizations. While the concept is similar to self-insuring, the organization (or organizations) establish a separate insurance entity.

Why Join a Captive?

An employee benefits captive can offer a faster return than a commercial insurance captive: many companies begin seeing returns after only 18 months, compared to the typical five-year period for commercial insurance captives.

Additional advantages include:

  • Increased visibility into health plan performance
  • More control over plan design
  • Clinical outreach options
  • Transparent vendor compensation
  • Increased control over risk
  • Fewer regulations
  • Lower administrative costs

Compared to self-funding, a group medical captive can help organizations looking to gain affordable stop-loss protection against the high cost of ongoing and catastrophic claims. When multiple organizations join together to retain similar risks, they are able to gain better protection against unpredictable claims volume instead of relying entirely on their stop-loss.

While both self-insuring and a captive arrangement give employers have greater control over plan design, a captive can offer additional flexibility and access to benefits that meet the unique needs of their workforce.

What Benefits Can Fit Within a Captive?

Depending on the captive, the following risks may be a fit for a group employee benefits captive:

  • Medical stop-loss
  • Health claims
  • Wellness / wellbeing programs
  • Dental
  • Vision

Because each captive is designed by its member-owners, it depends on the group and which risks they prefer to fit within the captive versus self-insuring or transferring to a traditional insurer.

A captive will also use some of the premium dollars to purchase stop-loss coverage, transferring a portion of the captive’s risk associated with large medical claims to a reinsurer, while still providing coverage for smaller (frequent) claims through the captive.

What Are the Benefits of an Employee Benefits Captive?

Risk pooling – as mentioned above, when organizations pool risk, they are less vulnerable to individual high cost claims.

Additional resources – in a captive arrangement, organizations have access to additional resources that help resolve claims and contain costs, such as:

  • Care coordination services
  • Surgical / imaging bundling solutions
  • Medicare advocacy programs
  • COBRA advocacy programs
  • Prescription drug consortium
  • Specialty prescription management

Fair premiums and stable renewals – average increases in stop-loss renewals can range from 7-9%, and can even max out as high as a 30% increase after unusually challenging claims years. A captive can stabilize these increases.

Access to data & insights – captives share insights from their analytics, offering valuable insights into the way employees are using their benefits and how your money is being spent. This can help inform future decisions about plan design.

No new laser at renewal – carriers can assign a higher specific deductible (a laser) to an individual with a known medical condition or an expectation of high claims. This additional risk is retained by the employer in exchanged for lower premiums, and if those claims do not materialize, the plan can benefit. A captive can eliminate the option for the carrier to carve out a potential claimant from the stop-loss policy, giving their employer the peace of mind of knowing they won’t be financially responsible for their medical expenses.

How Do I Get Started With a Captive?

If you are interested in learning more about employee benefits captives, understand that establishing and operating a captive requires expertise in insurance management. Employers who are considering this approach should consult with a knowledgeable broker who can provide expert consultation and guidance through the complexities of starting or joining a benefits captive.

If you’re interested in discussing your options, contact us.

New call-to-action

Learn More About Captives

Don’t miss the other entries in this series:

Captives 101: What is Captive Insurance?

What is Group Captive Insurance?

Captives vs. Risk Retention Groups: What’s the Difference?

This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.