Captive insurance is making waves as a creative solution for companies looking to take control of their healthcare costs. But what is captive insurance, and could it be the secret sauce your employee benefits package needs? Let’s demystify this funding strategy.

What is a captive insurance company?

When joining a captive, you’re independently self-funded, but with the protection and purchasing power of a pool of companies. A captive insurance company is essentially an administrator of a group of companies to purchase stop-loss insurance.

Here’s how captives work:

1. A group of companies form their own insurance company—the “captive.” You can also join an existing captive.
2. Each member contributes to a shared pool of funds.
3. This pool is used to pay for members’ employee health claims.
4. The captive purchases stop-loss insurance to protect against catastrophic claims.

Think of it like you’re creating your own mini insurance company with a group of other businesses, allowing you to lower your costs and have more control over your healthcare spending.

For example, let’s say TechVille, a group of 10 tech startups, decides to form a captive. Each company contributes $500,000 to the pool, creating a $5 million fund. When an employee at one of the member companies needs a $100,000 surgery, this shared fund pays for it. And the best part: the captive handles the administration of the claim for that surgery.

The pros of captive insurance plans for employee benefits

This employee benefits funding strategy comes with a few distinct advantages:

• Cost-saving potential: By cutting out the middleman (traditional insurers), captives can reduce their overall healthcare costs.
• Greater control: Members of the captive have a say in the plan design, risk management strategies, and claims handling processes.
• Shared risk: The collective nature of a captive means you’re not alone in bearing the financial risk.
• Potential for dividends: If claims are lower than expected, members of the captive may receive money back.
• Access to plenty of data: Captives provide detailed claims data, allowing for better decision-making and targeted healthcare plans.

The cons of captive insurance plans for employee benefits

However, like all funding options, captives also present some challenges:

• Initial capital investment: Setting up a captive requires significant upfront costs.
• Administrative difficulty: Captives are more complex to manage than traditional funding arrangements, like a fully insured health plan.
• Long-term commitment: Captives typically require a multi-year commitment from members.
• Shared liability: While the risk is shared, so is the liability. If other members have high claims, it could impact your costs.
• Regulatory challenges: Captives must navigate complex regulatory environments.

What types of companies would benefit most from a captive insurance plan?

Captive insurance isn’t the right choice for everyone, but it could be the right choice for you if you fall under one of these categories:

• Midsize to large companies: Typically, those with more than 100 employees can contribute meaningful capital to the captive.
• Companies with strong financials: The initial investment and potential for variable costs requires financial stability.
• Businesses in similar industries: Captives work best when member companies have similar risk profiles.
• Organizations committed to proactive risk management: Captives reward companies that actively work to reduce their healthcare costs through wellness programs and other initiatives.
• Companies looking for long-term solutions: Captives are a long-term strategy, not a quick fix.

The different types of captive insurance companies

Not all captives are created equal. Here are a few common types:

• Single-parent captives: owned and controlled by one company
• Group captives: owned by multiple unrelated companies (like our TechVille example)
• Association captives: formed by members of an industry association
• Rent-a-captives: allow companies to participate in a captive structure without forming their own

Each type has its pros and cons, and the right choice depends on your company’s specific needs and circumstances.

Talk to your employee benefits broker about how to fund your benefits

Deciding how to fund your employee benefits requires a deep dive into your goals, your benefits strategy, your HR team’s capacity to handle complicated processes, and more. Your benefits broker can guide you through this complex world of funding, explaining options like captives and helping you understand which approach would best fit your company’s unique needs and risk tolerance.

At Nava, we believe in leaving no stone unturned when it comes to optimizing your employee healthcare plans. We’re not just about presenting options—we’re about finding the perfect fit for your business's unique needs.

Curious about whether captive insurance could be the missing piece in your benefits puzzle? Give us a call, and we’ll figure it out together.

Next Steps

To continue learning about captive insurance, watch our benefits funding masterclass.