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Insurance Captives and Credit Unions: A Perfect Match?

Offering robust and competitive benefits to employees is paramount to the success of the credit union movement, but at what cost? Medical insurance costs continue to rise, and employees always seem to take the brunt of it. Maybe credit unions should just form their own insurance company? Wait… can we?

The answer is yes, but we need to understand the problem before we can consider a viable solution.

The House Always Wins

Most credit unions, especially those with less than 500 employees, utilize what’s called a fully-funded health insurance plan. A fully-funded plan is structured so that an employer purchases health coverage from a carrier for a per-employee premium. Both the risk and payment are transferred to the carrier while the employer sees a flat monthly billing statement until the end of each annual renewal.

While relatively stable within the plan year, the premiums will fluctuate (almost always up) every new plan year based on a few factors that are typically never disclosed to the credit union. Oftentimes premiums increase because of the community rated health pool your employees are lumped into (more on that topic in a bit).

Either way, with a fully-funded health insurance model, the house (or in this case, the insurance carrier) always wins. Consider this scenario of “heads they win, tails you lose”:

  • If your credit union experiences a year with higher-than-expected medical claims – guess what? Your premiums go up, sometimes way up, the following year. The carrier wins.
  • If your credit union experiences a year with lower-than-expected medical claims – guess what? Your premiums still go up, because the carrier doesn’t think you will have two “good” years in a row. The carrier wins.

Worst of all, you now have a new higher baseline cost each year as your premiums continue to go up. Sound familiar? In a fully-funded health insurance plan, the house is stacked against you.

Community Rated Pools

Community rating refers to the practice of charging a common premium to all members of a mixed risk pool who may have widely varied health spending for the year. It inevitably makes chronically healthy individuals subsidize, with their insurance premiums, the healthcare used by chronically sicker individuals. In a community rated pool, typically 20% of employers are driving costs up for all other employers in the pool.

Most credit unions, especially those in fully-funded health plans, are lumped into these community rated pools – meaning they are grouped and priced together with other industries such as manufacturing companies and construction firms. If your credit union is utilizing a fully-funded insurance plan and is subject to community rating, it is a safe bet that your group is subsidizing the pool. 

Data You Can Actually Use

Now, we’re getting somewhere. Our CUSO’s latest claims analytics prove that credit union’s per-employee-per-year (PEPY) medical claims costs are 23% less than other industries. Are we as credit unions really 23% healthier than other industries? Our data says YES!

Financial Institution data versus other industry data for healthcare costs

We can leverage this data to transition away from fully-funded plans, create our own risk pools, and drive down medical insurance costs.

A Self-Funded Insurance Captive

Self-funding is a common and more efficient funding strategy employers use to purchase less insurance by paying for a percentage of their employees’ lower-cost medical claims out of their own pocket. An insurance captive is essentially a group of employers forming their own insurance company to fund their employees’ higher-cost medical claims. These models provide employers with enhanced claims data to better understand what’s driving their medical insurance expenses so they can implement specific strategies to help the employees that need it the most.

Here’s why insurance captives and credit unions are a perfect match:

  • Self-funding a portion of your employees’ medical insurance claims means each participating credit union is buying less insurance, compared to a fully-funded plan.
  • Depositing collateral monies through a captive means credit unions are buying less insurance. The pooled money invested in a captive is used to fund higher-cost medical claims.
  • Purchasing stop-loss insurance as a larger pool means credit unions are paying less for insurance and they’re buying less of it. The amount and cost of stop-loss insurance is mitigated when:
    • Each credit union is self-funding a portion of their employees’ low-cost claims
    • Higher-cost claims are funded through the captive
    • Stop-loss insurance is purchased as a group and only used to fund the highest-cost claims
  • Any unused captive funds are then shared back to the participating credit unions each year.

Best of all, a captive can be exclusive to the credit union participants. Healthier, like-minded groups that are banding together to purchase insurance more efficiently and deliver their employees the benefits they deserve.