Benefits - TOHI 2016 PAC Conference

Energy Insurance Services, Inc. Breakout Session

Tuesday, October 25, 2016

Proprietary and Confidential ©Copyright 2016 Spring Consulting Group, LLC. All rights reserved

LinkedIn: spring-consulting-group-llc Twitter: @SpringsInsight

Spring Consulting Group, LLC EIS – Retiree Medical and Medical Stop-Loss in a

Captive October 25, 2016

3

State of the Retiree Medical Market

4

Retiree Healthcare Economic Pressures

1

Retiree costs increase

2

Budget pressures

3

Credit rating agency

concerns

4

Aging workforce with baby boomers

approaching retirement

5

Sizable unfunded

OPEB liabilities

6

Healthcare reform

5

Current State of Retiree Medical Plans Employers continuing to tweak plan design are: Tightening the eligibility requirements Closing the plan to new retirees Eliminating subsidies Increasing the retirees’ portion of the premiums Increasing the coinsurance payments and deductibles Modifying and/or reducing the plan benefits Moving retirees to the exchanges

Employers/employees/individuals are just beginning to recognize the need to fund

6

Current State of Retiree Medical Plans Employers are moving down the path of offering: Continuing “as is” – the minority except for retirees in pay status

or fully eligible Capping plans – hard dollar or subsidy time limit Access only Offering individual programs Moving towards an exchange based benefit Eliminating the benefit

Pre-65 year olds have limited options and lack of retiree medical plans is the largest single reason why those eligible to retire continue to work

Post-65 year olds have plenty of choice – AARP and beyond

7

Plan Designs

8

Employer’s Changing Strategy

Status Quo As Is

Maintaining - Reducing Costs Through Plan Design

Supporting – Access Only – Group Pricing or

Exchanges

Eliminating

Empl

oyer

Effo

rt a

nd C

osts

Retiree Engagement

Funding

High

Low

Likely hood

9

Employer’s Changing Strategy Status Quo

“As Is” Maintaining Supporting Eliminating

Design • Few changes As is plus • Some changes • HDHPs • HRAs • Additional funding

Maintaining plus limits on employee funding • HRAs/HSAs/RRAs • Some funding • Exchanges

Funding Unfunded to HSAs to captives

Funding legacy liabilities

Funding legacy liabilities

No funding

Benefits Support Heavy Moderate Light None

10

Introduction What is Program 15?

11

What is Program 15? Energy Insurance Services Mutual Business Program

#15 is a protected cell captive within EIS that writes reimbursement policies for retiree medical plans Benefits covered are pre-65 and post-65 medical and Rx

benefits

The policies are called Non-cancellable Accident & Health policies, and are treated as life insurance for tax purposes

The policies reimburse individual members’ VEBAs for a portion of incurred retiree medical claims

12

Who Are the Participants? Program 15’s participants are energy companies and

utilities with retiree medical plans Current participating members are: Oklahoma Gas & Electric ONEOK, Inc. ONE Gas, Inc. Kinder Morgan, Inc. Xcel Energy Inc.

Total Program 15 assets are approximately $238 million as of June 30, 2016

13

The Transaction A participating VEBA will purchase a Non-cancellable Accident

& Health policy from EIS, a captive domiciled in South Carolina The VEBA is the policyholder, owner and the beneficiary. The

insureds are the employees. The VEBA holds the insurance policy as an asset.

VEBAs are separate taxable entities that are established for the benefit of employees. By its design, the assets of the trust cannot revert to the employer but must be used for the benefit of employees.

14

How Program 15 Works with Retiree Medical

Company Company contributes funds to

its VEBA Trust

The VEBA Trust purchases insurance

from EIS/MBP 15

1

2

EIS/MBP 15

VEBA Trust

Assets are invested in marketable securities, and MBP 15 reimburses the

VEBA based on actual claims

3

4

15

Benefits of Program 15 VEBAs offer a tax favored employee benefits pre-

funding mechanism Earnings of a VEBA for funding retiree medical and dental

may be subject to Unrelated Business Income Tax (UBIT) if the assets are attributable to non-union retirees

If the VEBA purchases a life policy (and a Non-cancellable Accident & Health policy is treated a life policy), the earnings are tax sheltered if held until the liabilities are fulfilled

16

Reimbursement of Claims The policies in Program 15 determine the level of

reimbursement based on the member’s Current Benefit formula

This formula is a “ribbon of coverage” that pays a percentage of claims above a deductible, up to an annual maximum

The next slide shows an example

17

Retiree Medical Claim Components

$4,500

$4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0 $0 $400 $800 $1,200 $1,600 $2,000 $2,400 $2,800 $3,200 $3,600 $4,000

Over $1,600 Max 80% Insurance 20% Coinsurance $500 Deductible

18

Joining Program 15

19

Joining Program 15 As shown in the transaction slide, a company wishing

to join Program 15 must contribute to a VEBA if they do not already have pre-funding in place

The company chooses a Covered Population The Covered Population is the initial group of active

employees, retirees, and spouses who will be covered by the Non-cancellable Accident & Health policy

The company purchases the Non-cancellable Accident & Health policy from EIS, specifying a Guaranteed Benefit and program assumptions

20

Payout Pattern – Pre-65 vs. Pre-65 and Post-65 Pre-65 claims are significantly reduced after 15-20

years as retirees age out

21

Joining Program 15 The premium is allocated 98% to the individual

member’s Separate Account and 2% to a Program 15 General Account

The General Account provides additional risk shifting and risk distribution to meet insurance requirements

22

Ongoing Program Management

23

Guaranteed Benefit and Current Benefit The Guaranteed Benefit is a lower level of reimbursement

that is guaranteed by EIS The Formula Reserve is the present value of Guaranteed

Benefits Initially, policies are priced to be significantly overfunded

on a Guaranteed Benefit basis If program assets are reduced enough to approach the

Formula Reserve (an amount called the Trigger Point), greater investment restrictions are imposed on the Separate Account

The Current Benefit is the level of benefit that the policy can afford to reimburse in a given year The Current Benefit provides a higher level of reimbursement

than the Guaranteed Benefit

24

Annual Pricing The Current Benefit is updated on an annual basis, based

on actual asset performance, medical claims or premium payment experience, and updated demographic data

The member provides updated census data for the covered population

Spring completes an annual valuation based on updated census data, historical claims experience, and updated asset values to produce each year’s pricing

The result of the annual pricing is a revision to the Current Benefit’s ribbon of coverage

25

Sample Benefit Computation Factors Over Time

2002 2003 2004 2005 2006 2007 2008 2009 2011

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Attachment Point

$1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $500 $500 $500 $500

Benefit Percentage

77.00% 86.00% 83.00% 83.00% 85.00% 82.10% 68.50% 66.98% 92.01% 95.62% 96.81% 91.06%

Annual Maximum

$3,080 $3,440 $3,320 $3,320 $3,400 $3,284 $2,055 $2,009 $13,801 $14,342 $14,521 $27,318

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Below Attachment Point Partially Covered

The blue portion of the bar represents the deductible portion of each insured’s annual claim amount The green portion of the bar represents the portion of each insured’s annual claim amount that is partially

covered by the policy For example, in 2011 the program provides coverage for 92.01% of the amount of claims greater than $500

and less than $15,000 for each insured

26

Claims Reimbursement Process Claims data is sent to Spring on a quarterly basis,

usually directly from the carriers, although in some cases it comes from the member

Spring uses the claims data to calculate year-to-date claims paid on behalf of the Covered Population

Based on the Current Benefit Formula, Spring recommends the total amount to be reimbursed

A sample claims reimbursement memo will be distributed at the conclusion of the session

27

Quarterly Reserves Overall Program 15 financials are compiled quarterly,

including reserve levels for each member The reserves calculated consider the current market

value of assets, claims incurred but not yet paid (IBNR), outstanding investment fees, net tax effects, etc.

A sample quarterly reserve memo will be distributed at the conclusion of the session

28

Program Flexibility Program 15 has a long history of providing flexibility to its

members based on the member’s individual needs and regulatory changes

Recently, as a result of Revenue Ruling 2014-15, Program 15 reduced the General Account allocation from 5% to 2%

Members are permitted to contribute additional premium each year and add to their Covered Population

Recently, members have changed the specific benefits covered under Program 15 One member stipulated that going forward only pre-65 benefits

would be covered by the policy One member changed their post-65 plan to be a level annual RRA

contribution to retirees and Program 15 was able to accommodate this change

29

Medical Stop-Loss in a Captive

30

Key Goals and Objectives Many organizations have self-insured medical coverage for

employees and dependents, with stop-loss coverage protecting against large claims, for example: Specific stop-loss attaching at $300,000 per claimant Aggregate stop-loss attaching at 125% of expected total claims

Key objectives in exploring including medical stop-loss in a captive include, but may not be limited to: Assessing the productivity and efficiency of their stop-loss program

offered to its members to determine if adjustments should be made Reducing cost of insurance programs over time Lessening dependence on traditional insurance and shifts in market Improving cash flow and more efficient loss funding

Spring has found that many organizations have the capacity to increase retention levels on medical stop-loss, and this increase can be placed into the captive

31

The Medical Stop-Loss Transaction Direct Insurance

Company

Captive

Company pays premiums to Captive

Captive insures Company exposure and pays claims

Reinsurance

Captive pays premiums to a Reinsurer

Reinsurer pays claims

The captive can write this policy directly

32

Sample Program Specific Stop-Loss in a Captive

Captive

The captive provides a secure way to self insure health risks

Typical savings are 5% to 20% of premium

The captive holds reserves for the employer

to pay individual claims over each member’s

retained risk SIR

Employer Self Insured Retention

(SIR) Level

Individual Claims

Aggr

egat

e Cl

aim

s

$600,000

Employer retains some risk to reduce their

overall costs

Commercial Market

$300,000

33

Summary of Captive Advantages Manage Costs • Accelerate cash flow through premiums, claims and reserves • Reduce frictional costs (commissions, taxes, risk charges,

administration) • Capture investment return • Improve cash flow and centralize investment of reserves

Improve Risk Management • Operate and manage a central risk pool • Implement appropriate stop loss reinsurance to manage peak risks • Reduce overall cost of risk • Manage retention levels to corporate objectives • Design structure to incentivize behaviors that lead to lower costs

34

Questions

35

Thank You

w w w . s p r i n g g r o u p . c o m

Head office: 30 Federal Street, 4th Floor, Boston, MA 02110

Karin J. Landry, CEBS, ACI, CLTC Managing Partner

Spring Consulting Group, LLC Karin.Landry@SpringGroup.com Phone: 617-589-0930; ext. 102

Fax: 617-589-0931

Thomas M. King, ASA, EA, MAAA, CERA Senior Consulting Actuary

Spring Consulting Group, LLC Tom.King@SpringGroup.com

Phone: 617-589-0930; ext. 128 Fax: 617-589-0931