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Last year we published our inaugural Stop-Loss Survey, which allowed employers and their advisors to more accurately benchmark deductibles and premium levels based on peers of similar size and geographic area. As a result of the success of our 2017 Marsh & McLennan Agencies Stop-Loss Survey, we are excited to share with you the results of our 2018 survey.
The upper Midwest region of Marsh & McLennan Agency (MMA) is comprised of 11 offices in 10 states providing employee benefits consulting to 2,500 employers throughout the USA. As with all aspects of the insurance industry, the only constant is change. The stop-loss excess insurance market is no exception to the innovative cost containment strategies being implemented by payers and their customers, the employer. Expanded utilization of shared risk arrangements by third party administrators (TPAs) and providers, broad interest in reference-based pricing, growth of employer stop-loss captives and the advent of what is expected to be the first million-dollar prescription are just a few of the pressing topics our employers and consultants are implementing strategies around. Now more than ever, ensuring appropriate coverage levels and premium rates remain the focus for most employers.
To provide benchmarks for reinsurance coverage that are representative of local markets, 243 MMA clients were surveyed. These respondents cover nearly 200,000 employees and vary in size from nine to 20,000 covered employees, with an average of 825. Of the respondents, 99% purchased some level of specific (individual) stop-loss coverage, although at varying levels from $20,000 to $1,000,000 per individual. In addition, 135 (56%) of employers purchased some level of aggregate coverage with corridors ranging from 10% to25%.
Stop-Loss Excess Insurance Coverage Definitions
Specific Coverage: Insures the employer against a catastrophic loss incurred by one individual over a certain dollar limit (specific deductible) for a specified period of time.
Aggregate Coverage: Insures the employer against unusually high overall claim levels for the entire covered group for a specific period of time. Only claims below the specific stop-loss deductible on covered individuals are eligible.
Aggregate Specific: A separate deductible requiring fulfillment before any specific stop-loss coverage is applicable.
Laser: An individual or individuals that are carved out specific risks from stop-loss coverage, or assigned a higher specific stop-loss deductible on that risk.
Level-Funding: A self-funded mechanism in which an employer pays a fixed monthly premium which covers the cost of administration, the stop-loss excess reinsurance premiums and aggregate claims funding. At the close of the policy period, a settlement is performed with excess funding returned to the employer or in the case of inadequate funding, the employer will reimburse the carrier the difference.
Longevity of Self-Funding
According to the Mercer Annual Survey of Employers, 20% of employers are currently self-funding their benefits. For more and more employers, the time is right to consider self-funding their benefits. While 48% (up from 42% in 2017) of our employers have been self-funded for more than ten years, another 10% have begun self-funding in the past two years. With piqued interest in the self-insured mechanism, we expect the number of self-funded employers will continue to increase.
Specific and aggregate contracts are generally written in one of two ways—paid or incurred—depending on the needs of the employers. Paid contracts include contracts with coverage for claims incurred prior to the policy period, while incurred contracts include coverage for claims incurred during the policy period yet paid after the policy period. Nearly 86% of employers indicated that they had some form of paid coverage, with 55% indicating that they have a coverage period longer than 24/12 and 27% with 24/12 coverage.
Many third party administrators (TPAs) offer stop-loss coverage themselves or through a related company, which can provide efficiencies and ease for employers and even bundled premium savings. Fifty-three percent of responding employers purchased this coverage directly from the TPA or their related reinsurance company. The remaining 41% of employers placed coverage with outside stop-loss carriers, with the top carriers being Tokio Marine HCC, SunLife and Optum.
Average Specific (Individual) Deductible by Covered Employees
Individual stop-loss deductibles vary significantly even between like-sized employers. Employers who are more risk adverse, have cash flow needs or are new to self-funding generally tend to purchase lower deductibles than their counterparts with greater risk appetites. As an example, the most frequent deductible purchased by employers was $100,000, and was purchased by employers with between 80 and 1100 covered employees. Overall the average specific deductible was approximately $168,000.
Many employers who prefer to keep their individual stop-loss deductible down but are willing to accept additional risk for potential savings are including aggregating specific deductibles with their current policies. With this type of deductible, the employer agrees to take the risk on a separate deductible that assumes the risk of the initial portion that the traditional specific stop-loss would cover. This can often provide dollar-for-dollar premium savings offset by the claim; risk is transferred to the employer and generally not applicable to the aggregate deductible. In 2018, 20% of employers purchased an aggregating specific deductible to be included in their coverage. The average aggregating specific deductible was $92,000, or 59% of the individual specific deductible for those with aggregating specific deductibles.
To keep premium costs down and to ensure transfer of unknown risk, reinsurers may laser specific individual(s) at the initial policy inception or upon renewal. These lasers most often increase the specific deductible for the individual(s) but can exclude stop-loss coverage for the individual completely. In 2018, 11% of employers indicated that they had at least one individual lasered on their current policy. The average laser amount was $286,000 per individual, or 2.2 times the individual specific deductible for those with lasers.
Average Premium by Deductible
Average premiums by deductible, adjusted to a paid contract basis and for the impact of lasers and aggregating specific deductibles, are reported for respondents with stop-loss deductibles of $700,000 or less. Each marker indicates an individual employer’s specific deductible and applicable premium per covered employee per month. Employers reported initial increases of 13.4% but after benefit design changes and/or negotiations, final increases in specific premium were reported at 3.7% on average.
Average Premium by Deductible and Coverage Type
A simplified estimation of premium levels for common types of coverage are provided below at common deductible increments based on the trend line from the prior chart. In general, premiums for coverages 24/12 or longer are equivalent to paid premiums.
In addition to specific individual coverage, employers can purchase aggregate coverage, which is intended to provide reinsurance coverage in the event that overall claims experience is high in any given year. This coverage is generally purchased as an aggregate corridor above expected claims. Common increments for this coverage range from 110% to 125% with 85% of employers with aggregate coverage purchasing coverage with a 25% aggregate corridor. Of the 56% of employers purchasing aggregate coverage, the average specific deductible was $219,000. At levels higher than this, employers primarily chose not to purchase aggregate coverage, as they are likely more immune to the impact of annual fluctuations in claims and may have more historical experience and reserves built up.
To ensure appropriate aggregate coverage, it becomes increasingly important that employers ensure that expected claims are set appropriately when applying the aggregate corridor. In a case where expected claims are appropriately estimated, the likelihood of an aggregate claim in any given year is less than 5% with a 25% aggregate corridor. In the event that expected claims are set unnecessarily high, the likelihood of an aggregate claim decreases in some cases to nearly 0%, providing little to no coverage with unnecessary premium expense.
Aggregate premiums are often quite low as compared to their specific counterparts; however they can vary significantly due to the very small likelihood of a claim in any given year. As a result, premium rating for this coverage is somewhat arbitrary and varies significantly from carrier to carrier. Of employers purchasing aggregate coverage, 27% had aggregate premiums that were included in their specific premiums. For those with separate rates for aggregate coverage, premiums varied significantly from $0.45 PEPM to $68.02 PEPM with an average of $8.67 PEPM.