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Benefits - TOHI 2016 PAC Conference
Energy Insurance Services, Inc. Breakout Session
Tuesday, October 25, 2016
Proprietary and Confidential ©Copyright 2016 Spring Consulting Group, LLC. All rights reserved
LinkedIn: spring-consulting-group-llc Twitter: @SpringsInsight
Spring Consulting Group, LLC EIS – Retiree Medical and Medical Stop-Loss in a
Captive October 25, 2016
3
State of the Retiree Medical Market
4
Retiree Healthcare Economic Pressures
1
Retiree costs increase
2
Budget pressures
3
Credit rating agency
concerns
4
Aging workforce with baby boomers
approaching retirement
5
Sizable unfunded
OPEB liabilities
6
Healthcare reform
5
Current State of Retiree Medical Plans Employers continuing to tweak plan design are: Tightening the eligibility requirements Closing the plan to new retirees Eliminating subsidies Increasing the retirees’ portion of the premiums Increasing the coinsurance payments and deductibles Modifying and/or reducing the plan benefits Moving retirees to the exchanges
Employers/employees/individuals are just beginning to recognize the need to fund
6
Current State of Retiree Medical Plans Employers are moving down the path of offering: Continuing “as is” – the minority except for retirees in pay status
or fully eligible Capping plans – hard dollar or subsidy time limit Access only Offering individual programs Moving towards an exchange based benefit Eliminating the benefit
Pre-65 year olds have limited options and lack of retiree medical plans is the largest single reason why those eligible to retire continue to work
Post-65 year olds have plenty of choice – AARP and beyond
7
Plan Designs
8
Employer’s Changing Strategy
Status Quo As Is
Maintaining - Reducing Costs Through Plan Design
Supporting – Access Only – Group Pricing or
Exchanges
Eliminating
Empl
oyer
Effo
rt a
nd C
osts
Retiree Engagement
Funding
High
Low
Likely hood
9
Employer’s Changing Strategy Status Quo
“As Is” Maintaining Supporting Eliminating
Design • Few changes As is plus • Some changes • HDHPs • HRAs • Additional funding
Maintaining plus limits on employee funding • HRAs/HSAs/RRAs • Some funding • Exchanges
Funding Unfunded to HSAs to captives
Funding legacy liabilities
Funding legacy liabilities
No funding
Benefits Support Heavy Moderate Light None
10
Introduction What is Program 15?
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What is Program 15? Energy Insurance Services Mutual Business Program
#15 is a protected cell captive within EIS that writes reimbursement policies for retiree medical plans Benefits covered are pre-65 and post-65 medical and Rx
benefits
The policies are called Non-cancellable Accident & Health policies, and are treated as life insurance for tax purposes
The policies reimburse individual members’ VEBAs for a portion of incurred retiree medical claims
12
Who Are the Participants? Program 15’s participants are energy companies and
utilities with retiree medical plans Current participating members are: Oklahoma Gas & Electric ONEOK, Inc. ONE Gas, Inc. Kinder Morgan, Inc. Xcel Energy Inc.
Total Program 15 assets are approximately $238 million as of June 30, 2016
13
The Transaction A participating VEBA will purchase a Non-cancellable Accident
& Health policy from EIS, a captive domiciled in South Carolina The VEBA is the policyholder, owner and the beneficiary. The
insureds are the employees. The VEBA holds the insurance policy as an asset.
VEBAs are separate taxable entities that are established for the benefit of employees. By its design, the assets of the trust cannot revert to the employer but must be used for the benefit of employees.
14
How Program 15 Works with Retiree Medical
Company Company contributes funds to
its VEBA Trust
The VEBA Trust purchases insurance
from EIS/MBP 15
1
2
EIS/MBP 15
VEBA Trust
Assets are invested in marketable securities, and MBP 15 reimburses the
VEBA based on actual claims
3
4
15
Benefits of Program 15 VEBAs offer a tax favored employee benefits pre-
funding mechanism Earnings of a VEBA for funding retiree medical and dental
may be subject to Unrelated Business Income Tax (UBIT) if the assets are attributable to non-union retirees
If the VEBA purchases a life policy (and a Non-cancellable Accident & Health policy is treated a life policy), the earnings are tax sheltered if held until the liabilities are fulfilled
16
Reimbursement of Claims The policies in Program 15 determine the level of
reimbursement based on the member’s Current Benefit formula
This formula is a “ribbon of coverage” that pays a percentage of claims above a deductible, up to an annual maximum
The next slide shows an example
17
Retiree Medical Claim Components
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0 $0 $400 $800 $1,200 $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000
Over $1,600 Max 80% Insurance 20% Coinsurance $500 Deductible
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Joining Program 15
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Joining Program 15 As shown in the transaction slide, a company wishing
to join Program 15 must contribute to a VEBA if they do not already have pre-funding in place
The company chooses a Covered Population The Covered Population is the initial group of active
employees, retirees, and spouses who will be covered by the Non-cancellable Accident & Health policy
The company purchases the Non-cancellable Accident & Health policy from EIS, specifying a Guaranteed Benefit and program assumptions
20
Payout Pattern – Pre-65 vs. Pre-65 and Post-65 Pre-65 claims are significantly reduced after 15-20
years as retirees age out
21
Joining Program 15 The premium is allocated 98% to the individual
member’s Separate Account and 2% to a Program 15 General Account
The General Account provides additional risk shifting and risk distribution to meet insurance requirements
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Ongoing Program Management
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Guaranteed Benefit and Current Benefit The Guaranteed Benefit is a lower level of reimbursement
that is guaranteed by EIS The Formula Reserve is the present value of Guaranteed
Benefits Initially, policies are priced to be significantly overfunded
on a Guaranteed Benefit basis If program assets are reduced enough to approach the
Formula Reserve (an amount called the Trigger Point), greater investment restrictions are imposed on the Separate Account
The Current Benefit is the level of benefit that the policy can afford to reimburse in a given year The Current Benefit provides a higher level of reimbursement
than the Guaranteed Benefit
24
Annual Pricing The Current Benefit is updated on an annual basis, based
on actual asset performance, medical claims or premium payment experience, and updated demographic data
The member provides updated census data for the covered population
Spring completes an annual valuation based on updated census data, historical claims experience, and updated asset values to produce each year’s pricing
The result of the annual pricing is a revision to the Current Benefit’s ribbon of coverage
25
Sample Benefit Computation Factors Over Time
2002 2003 2004 2005 2006 2007 2008 2009 2011
Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Attachment Point
$1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $500 $500 $500 $500
Benefit Percentage
77.00% 86.00% 83.00% 83.00% 85.00% 82.10% 68.50% 66.98% 92.01% 95.62% 96.81% 91.06%
Annual Maximum
$3,080 $3,440 $3,320 $3,320 $3,400 $3,284 $2,055 $2,009 $13,801 $14,342 $14,521 $27,318
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Below Attachment Point Partially Covered
The blue portion of the bar represents the deductible portion of each insured’s annual claim amount The green portion of the bar represents the portion of each insured’s annual claim amount that is partially
covered by the policy For example, in 2011 the program provides coverage for 92.01% of the amount of claims greater than $500
and less than $15,000 for each insured
26
Claims Reimbursement Process Claims data is sent to Spring on a quarterly basis,
usually directly from the carriers, although in some cases it comes from the member
Spring uses the claims data to calculate year-to-date claims paid on behalf of the Covered Population
Based on the Current Benefit Formula, Spring recommends the total amount to be reimbursed
A sample claims reimbursement memo will be distributed at the conclusion of the session
27
Quarterly Reserves Overall Program 15 financials are compiled quarterly,
including reserve levels for each member The reserves calculated consider the current market
value of assets, claims incurred but not yet paid (IBNR), outstanding investment fees, net tax effects, etc.
A sample quarterly reserve memo will be distributed at the conclusion of the session
28
Program Flexibility Program 15 has a long history of providing flexibility to its
members based on the member’s individual needs and regulatory changes
Recently, as a result of Revenue Ruling 2014-15, Program 15 reduced the General Account allocation from 5% to 2%
Members are permitted to contribute additional premium each year and add to their Covered Population
Recently, members have changed the specific benefits covered under Program 15 One member stipulated that going forward only pre-65 benefits
would be covered by the policy One member changed their post-65 plan to be a level annual RRA
contribution to retirees and Program 15 was able to accommodate this change
29
Medical Stop-Loss in a Captive
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Key Goals and Objectives Many organizations have self-insured medical coverage for
employees and dependents, with stop-loss coverage protecting against large claims, for example: Specific stop-loss attaching at $300,000 per claimant Aggregate stop-loss attaching at 125% of expected total claims
Key objectives in exploring including medical stop-loss in a captive include, but may not be limited to: Assessing the productivity and efficiency of their stop-loss program
offered to its members to determine if adjustments should be made Reducing cost of insurance programs over time Lessening dependence on traditional insurance and shifts in market Improving cash flow and more efficient loss funding
Spring has found that many organizations have the capacity to increase retention levels on medical stop-loss, and this increase can be placed into the captive
31
The Medical Stop-Loss Transaction Direct Insurance
Company
Captive
Company pays premiums to Captive
Captive insures Company exposure and pays claims
Reinsurance
Captive pays premiums to a Reinsurer
Reinsurer pays claims
The captive can write this policy directly
32
Sample Program Specific Stop-Loss in a Captive
Captive
The captive provides a secure way to self insure health risks
Typical savings are 5% to 20% of premium
The captive holds reserves for the employer
to pay individual claims over each member’s
retained risk SIR
Employer Self Insured Retention
(SIR) Level
Individual Claims
Aggr
egat
e Cl
aim
s
$600,000
Employer retains some risk to reduce their
overall costs
Commercial Market
$300,000
33
Summary of Captive Advantages Manage Costs • Accelerate cash flow through premiums, claims and reserves • Reduce frictional costs (commissions, taxes, risk charges,
administration) • Capture investment return • Improve cash flow and centralize investment of reserves
Improve Risk Management • Operate and manage a central risk pool • Implement appropriate stop loss reinsurance to manage peak risks • Reduce overall cost of risk • Manage retention levels to corporate objectives • Design structure to incentivize behaviors that lead to lower costs
34
Questions
35
Thank You
w w w . s p r i n g g r o u p . c o m
Head office: 30 Federal Street, 4th Floor, Boston, MA 02110
Karin J. Landry, CEBS, ACI, CLTC Managing Partner
Spring Consulting Group, LLC Karin.Landry@SpringGroup.com Phone: 617-589-0930; ext. 102
Fax: 617-589-0931
Thomas M. King, ASA, EA, MAAA, CERA Senior Consulting Actuary
Spring Consulting Group, LLC Tom.King@SpringGroup.com
Phone: 617-589-0930; ext. 128 Fax: 617-589-0931
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