Captive Structures

How does a stop-loss captive work?

Currently, most organizations use traditional, fully-insured plans or self-funded plans. Each has their pros and cons. However, what many people don’t know is there is something in between: captives.

Captives work by pooling stop loss claims at certain layers for multiple organizations into a single fund – the captive layer. Typically, participating organizations share a similar organizational profile in terms of size and risk.

In a stop-loss captive, organizations keep a large percentage of the premiums paid to carriers under fully-insured plans and, at the same time, are better able to manage financial risk exposures by transferring a portion of the risk to a separate entity.

As with all stop-loss captives, PERMA’s Paradigm Health stop-loss captive has three levels of risk, each associated with a different level of claim cost:

• The first level of risk is paid by each participating organization on their own.
• The second level of risk is shared through the captive – the pooled stop-loss funds of all participating organizations.
• The third level of risk is covered by an outside carrier, who provides coverage for claims in excess of the captive risk level. Additionally, the carrier provides an aggregate to reduce the risk of the captive and each participating organization.

To join a stop-loss captive, every participating organization contributes a specified amount of premium and up-front collateral based on each organization’s actual experience and losses. Collateral is called when the cumulative result of the stop-loss captive has claims losses in excess of the stop loss premiums collected. Conversely, any surpluses in the pooled stop-loss level are distributed as a dividend on a pro-rata share based on premiums paid.

Take a look at the diagram below for a look at different levels of risk.