The ACA and Captives

An Uncertain Impact

Captives may yet play a role in managing health care risk, despite the advent of reform.
By: | November 1, 2013 • 8 min read

Yet, since the ACA passed in 2010, a lot has changed. Now that implementation of its major components is all but guaranteed, employers — particularly those that self-insure their employee health benefits, purchase stop-loss insurance to transfer medical risk above a certain retention point, or self-fund their stop-loss needs through a captive insurance vehicle — have been left to wonder about the law’s impending consequences, both intended and unintended. Employers may wonder, and even fear, that the Affordable Care Act will augment their captives’ exposure — even make the traditional insurance market more appealing.

Truth be told, self-insuring employers that use captives had best be wary of uncertainties that could impact how they design their employee health care plans — but not just those necessarily resulting from the ACA.

Uncertainty No. 1: No More Limits

It should be noted that Debbie Liebeskind, a senior consultant at Towers Watson, doesn’t believe the ACA really influences employee benefits captives for large employers. When pressed, she did suggest that self-insured employers of all stripes ought to pause and re-evaluate their risk in light of one ACA proviso: the elimination of annual and lifetime maximums for essential health benefits.

“That has a direct impact on the dollar value of claims,” said Mike Ferguson, chief operating officer of the Self-Insurance Institute of America, a trade and lobbying group. We should also note that Ferguson also first stressed that ACA and captive insurance have very little to do with each other on paper. Health care reform has its impact at the build-block level, he explained, at the individual health plan and sponsor level.

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“There is no mention of captives in the ACA,” he said. “Stop-loss captives are not directly impacted by the health care law.”

But numerous unknowns mean that they very well could be going forward.

Beecher Carlson’s Senior Managing Director Berni Bussell agreed that captive owners ought to ensure their vehicles are funded to handle a catastrophic medical claim in the multimillion-dollar range.

“They are relatively infrequent, but when they hit, they hit big,” he said, adding that captives can cede the exposure to reinsurers for “sleep-easy cover” in a very traditional excess of loss transaction.

His colleague Jason Flaxbeard, senior managing director at Beecher Carlson, runs the broker’s captive practice. Flaxbeard added that reinsurers have been willing to accept that lifetime, infinite exposure in his experience.

Still, said Bussell, the head of managed care, the marketplace has not “come to a resting place” on this exposure.

“There’s still a good deal of thinking around what that’s going to mean,” he said.

From the vantage of Andrew Pareto, managing director and founder of Pareto Captive Services, a firm that manages employee benefit group captives for employees with 50 to 500 employees, the traditional insurance market for stop-loss group captives looking to cede some of their risk is not just settled, it’s expanded and softened.

Capacity is there, from such players as AIG, Berkley, QBE, Munich Re and IHC. In the case of the group captives his firm manages, and the design of most stop-loss group captives, he said, stop-loss carriers write the layer above the members’ retention and then cede it back to the captive.

Teri Weber, a partner and senior consultant with the Boston-based Spring Consulting Group, said after years of hesitancy, carriers have become much more comfortable reinsuring captive risk.

“When you think about it, people with captives are usually large employers or pretty savvy groups that have come together,” she said. “And what better client base than a really savvy consumer?”

Uncertainty No. 2: Kicked Cans and Taxes

Donald McCully, vice president of alternative risk transfer for Roundstone Insurance, said that the only ACA-related change germane to self-insuring employers (and by definition including those involved in stop-loss captives) was the employer mandate, the so-called “play or pay” penalty for employers with more than 50 workers that fail to provide employee health benefits (aka, “virgin groups”). This tenet received the “kick the can down the road” treatment from politicians and bureaucrats, said McCully.

Also impacted beyond virgin groups — or not impacted — are employers with large groups of low-paid workers who might not be able to afford to buy into an existing sponsored plan.

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If too few workers buy into an employer’s plan, that would be considered “discrimination” under the ACA.

Before the can got kicked, these two issues had been big unknowns for the self-insurance market, said McCully.

(Given the delay in implementation is one year, these unknowns will rise again.)

McCully pointed to one certain new ACA impact: higher costs for self-insured employers from the Transitional Reinsurance Program fee and the Patient-Centered Outcome Research (PCORI) fee. The former is a $63 annual charge (and $5.25 per individual monthly charge) on all plan sponsors in 2014, designed to stabilize the individual insurance market through 2016. The latter is a new fee ($2 per covered individual after October 2013 and indexed every year afterward through 2019) on all plan sponsors to fund research on medical treatment strategies. 

Uncertainty No. 3: Overzealous Regulators

Whether or not ACA will impact captives, state regulators with political intent to support the ACA could have — indeed, already are having — an impact.

Legislatures in some states, such as California and Rhode Island, said McCully, are eyeing more stringent rules to increase stop-loss attachment levels — which would make self-insurance of any form too expensive for smaller employers. Think of it as a gaming table, and these states are trying to raise the minimum bet to play at the self-insurance table.

The second level of activity is at the captive domicile level. Take the regulators in Washington, D.C.

“Washington, D.C., is not in favor of allowing small employers located in D.C. to self-insure their health care risks, including the establishment of medical stop-loss captives, if their motivation for doing so would result in removing young and healthy persons from the exchange, leaving older and less healthy employees in the exchange,” Dana Sheppard, associate commissioner of the district’s Department of Insurance, Securities and Banking, said in July.

Asked for this article to clarify, the district’s team stood by the July statement, but said that the position only applies to employers with fewer than 50 employees. Companies that were self-insured prior to the policy are also not affected at the moment.

But the district’s commissioner of the Department of Insurance, Securities and Banking, William White, added in an email, “The District of Columbia has not taken a position on small employers in the district who already self-insure their health insurance risks. The district will monitor the use of self-funded health insurance arrangements, including the use of stop-loss captives, once DC Health Link, the district’s health insurance marketplace, begins full operations.”

Experts on the other side of the self-insured business balk at the implications and assumptions behind this stance.

Pareto countered that employers are not looking to cherry-pick the best employees into their self-insurance plan and away from exchanges.

He reiterated the refrain of most people involved in self-insurance when he said that the arrangement is about employers wanting more control of their futures and their finances.

In addition, self-insuring their health care risks gives employers the chance to house their own data, on their own particular set of risks.

“If you are self-insured you’re going to have a little bit more control of your plan design, a little bit more control over the kinds of programs you want to offer to hopefully make some targeted changes for your population,” Spring Consulting’s Weber said.

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Pareto is concerned that these moves on the part of state governments represent the first of many moves by regulators against stop-loss insurance and self-insuring employers.

SIIA’s Ferguson called the D.C. stance a “political statement.” Captive regulators are essentially only supposed to enforce solvency, he said.

White’s response to that, in part, is that certain group stop-loss captives could be solvency risks. 

“Non-health insurer affiliated captives will not have the data, expertise or market presence to compete against health insurer led self-insurance plans and will be susceptible to underpricing to attract business.

“This can create insolvency risk and disrupt the small business insurance market,” he said in an email.

One Certainty?

Ultimately, the trend appears that health reform — and the inexorable inflation of health care costs due to numerous reasons — continues to prompt employers more than ever before to consider self-insuring or stop-loss captives.

More of Towers Watson’s large clients are considering using existing single-parent captives to manage their stop-loss exposure, said Liebeskind.

Midsize employers will always tend to evolve toward considering self-insurance as they grow, health care reform or not, she continued, but now they and even smaller employers think more and more about self-insurance instead of fully insured employee benefit plans.

The interesting twist is that by going to some form of self-insurance, employers will not avoid most of the ACA requirements. A move to self-insurance in any form would mean a plan would be considered a plan change and thus “non-grandfathered.” It would then be subject to ACA requirements, said Ferguson.

“You’re not getting yourself out of any requirements per se, but you are able to control the future of your health plan,” he said.

Matthew Brodsky is editor of Wharton Magazine. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]