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A Better Way to Stop-Loss: Captive Insurance for Self-Funded Plans

Self-funded employers can reserve for potential claims inside their own captive insurance company, creating a new profit center and gaining control.

The Stop-Loss Layer

There's a better way to stop loss. Taking control over your risk management program in a different way than before has proven to be effective for many successful business owners.

In self-funded medical or workers' comp plans, employers are responsible for any claims up to a certain level. This level is pre-determined in the plan and protects the employer from catastrophic loss. Any claim above that level is insured through traditional third-party insurance.

Stop-loss insurance through captive insurance companies
Reserving assets in your own captive creates a more efficient stop-loss solution.

A More Efficient Way to Reserve

Companies are advised to reserve for potential claims under the pre-determined level. But how? Many brokers don't address this important layer of exposure to the operating company, others suggest a trust, while most companies set aside reserves from their operating account to pay for potential claims.

There's a better, more efficient way: setting reserves aside for potential claims inside the company's own captive insurance company. There are three immediate benefits of reserving assets in this manner:

  • Limits of premium, coverage, and reserves are clearly defined and set.
  • Unused reserves are retained by the captive. A new profit center is created.
  • Control and flexibility of your risk management program is gained.

Why the Captive Premium Is Not an Additional Expense

In self-funded plans, the operating company is responsible for any claim up to the traditional stop-loss policy. Therefore, the captive premium for the stop-loss coverage is already accounted for, and should not be an additional expense. Rather, the captive premium is a more efficient way to reserve for this layer the company must reserve for anyway.

The Owner's Advantage

By formally insuring a layer of this exposure through the business's own captive insurance company, the operating company and owner are no longer at a disadvantage. The business is still paying claims if or when a loss occurs. Claims are now reimbursed from their captive rather than from the company operating account.

However, to the extent there are no claims, the owner now benefits by owning their own insurance company. Surplus can be utilized as reinsurance to the business, additional lines of coverage may be added when appropriate, the captive insurance company should be profitable, and the captive completes the risk management program of the operating company.