W^H? The Holmes Murphy Blog

  • Risk Retention…What’s That?

    Technically, risk retention must be defined before one can define risk transfer…which by definition, is INSURANCE.

    The dictionary defines insurance as this:

    Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of …

    For most business owners who purchase health insurance, the transfer of risk has become 100 percent transferred and 0 percent retained. Deductibles have stayed low as a percentage when compared to the cost of treatments and procedures. And, costs have trended at double-digit factors for much of the last 25 years. So why do employers choose to simply keep giving money to an insurance industry that has proven to be inept, at best, at flattening the costs associated with healthcare?

    Predictable risk is cheap to insurance. Predictable risk is easy to retain to a comfortable level.

    But…health insurance is unpredictable. Think about these…

    • Genetic disorders
    • Accidents
    • Catastrophic health events (heart attack, stroke, cancer)

    All of these things have existed since the beginning of time, so why are they so different now? They aren’t. They cost more to treat, but not any more or less predictable than they ever have been. So why has health insurance become such a mess to predict and insure? Take a look at the following:

    • Preventable chronic illness (diabetes, obesity-related illnesses, etc.)
    • New diagnosis technologies that find disease earlier, pull people into hospital beds for treatment protocols that will save more lives, and allow chronically ill people to live longer, more productive lives while living with chronic disease.
    • Pharmacy costs associated with chronic illness. No more “one prescription and done.” Many people now take prescriptions every day for the remainder of their lives.
    • Specialty, biologically engineered, injectable pharmaceuticals that have revolutionized medical treatment, while rocketing costs into the stratosphere.

    The problem with all of this is that we continue to pay more and more and many business owners have moved past frustration right on to hopelessness. In 25 years, the insurance industry hasn’t been able to solve it, and now even our brightest politicians haven’t been able to solve it.

    Enter captive health insurance companies!

    A captive insurance company is built and owned by like-minded business owners who are interested in owning their own risk and controlling their destiny. In this case, the common risk denominator isn’t workers’ compensation or auto or liability. No, it’s health risk. Personal, individual, and collective health risk.

    These business owners are interested in pooling their risk with a very few select businesses that all seem to possess positive demographics, and increasingly, that support a culture of wellness and health. The philosophy being that healthy companies that facilitate healthy environments and healthy employees spend less money on all of the preventable, lifestyle-related claims.

    So, each business takes risk on their own employees by taking a much higher deductible on them while maintaining a traditional plan design for their employees. The thought being that one or two random claims will be transferred at a higher deductible level and won’t hurt overall if we avoid the trending chronic illness that’s dooming most carriers right now. Then, the businesses themselves pool their money to buy the risk above their own high deductible, allowing them to purchase an even higher deductible from the insurance industry.

    This minimizes the reliance on the traditional insurance marketplace, while at the same time lessening the volatility of a large, ongoing claim. It’s a win-win…provided that the businesses commit to promoting individual accountability of each employee for their own personal health status.

    Captives have helped bring the evaluation of risk, the retainer of risk, and the transfer of risk BACK to the group health insurance marketplace. Innovation to create cost and quality transparency and new strategies to control emerging high cost treatments and inefficient old practices are being developed by these motivated, entrepreneurial employers. And the results are speaking for themselves.

    It took years of uncontrolled health insurance premium increases for the American employer to take a stand and re-evaluate their dependency on 100 percent risk transfer in the health insurance marketplace. It seems that good ole fashioned American ingenuity and innovation is alive and well. It can be found in the most unlikely of places — the health insurance marketplace — where health insurance captives are rapidly rising to prominence among employers who aren’t willing to accept the status quo. Are you?

    Let’s talk! I know I’ve thrown a lot at you to think about, so it’s likely you have questions. Feel free to ask away in the comments section below or reach out to me or any of our staff directly!

    Published on: 07.17.17

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