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. With recent trends and renewed interest in the self-insured funding mechanism, ensuring appropriate coverage levels and premium rates remains the focus for most employers. To provide our clients with benchmarks for reinsurance coverage that are representative of their local markets 218 MMA clients were surveyed. These respondents cover 135,000 employees and vary in size from 25 to 7,500 covered employees, with an average of 600 covered employees. Of the respondents, all purchased some level of specific (individual) stop-loss coverage, although at varying levels from $20,000 to $1,000,000 per individual. In addition, 149 (68%) of employers purchased some level of aggregate coverage with corridors ranging from 10% to 25%.
Self-Funding: "It's the Buzz"
With the uncertainty surrounding the Affordable Care Act, the passage of the Self-Insurance Protection Act and employers’ desire to offer competitive benefits, employers have been focusing much of their effort on when and if it is the appropriate time to self-insure their benefits. For more and more employers, the time is right to make this change. While 42% of our employers have been self-funded for more than ten years, another 11% 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 83% 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-nine percent of our 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 ranging from 85 to 940 covered employees. Overall the average specific deductible was approximately $141,000.
For employers who would prefer to keep their individual stop-loss deductible down but are willing to accept additional risk for potential savings, many employers are including aggregating specific deductibles to their current policies. With an aggregating specific deductible, the employer agrees to take the risk on a separate deductible that would cover the first portion that the specific stop-loss would cover. This can often provide dollar for dollar premium savings, but the claim risk is transferred to the employer and generally not applicable to the aggregate deductible. In 2017, 17% of employers purchased an aggregating specific deductible to be included in their coverage. The average aggregating specific deductible was $164,000, or 114% of the individual specific deductible.
In an effort 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 2017, approximately 11% of employers indicated that they had at least one individual lasered on their current policy. The average laser amount was $245,000 per individual, or three times the individual specific deductible.
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 nearly 85% of employers with aggregate coverage purchasing coverage with a 25% aggregate corridor. Of the 68% 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, 30% had aggregate premiums that we included in their specific premiums. For those with separate rates for aggregate coverage, premiums varied significantly from $0.46 PEPM to $77.00 PEPM with an average of $13.07 PEPM.
For those employers that are currently self-funded or considering the option, this survey can help ensure they are able to purchase an appropriate level of stop-loss coverage at a competitive price. For further questions on this report, your benefit decisions, or any other inquiries, please reach out to your local MMA representative.