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Self-funding arrangements are a funding strategy usually implemented by larger companies.  These differ form the typical fully-insured plans that most companies provide.  The advantages of Self-funded arrangements are:


  •    More control over pricing (no built in overhead/profit)
  •    Direct control on benefit design
  •    May avoid State premium taxes

Fully-Insured Plans

Fully-insured plans are annual contract charging a level premium a level premium for the plan year.  The premium includes the insurance company’s (carrier’s) estimate for administrative costs, overhead, and claim payments.  The premium is fixed, but the claims are variable so the carrier takes on the risk of the claims.  In a year when a company’s claims are below the expected level, the carrier increases their profit margin.  In a year where a company’s claims are higher than expected, the company may lose money.  The costs are fixed for the company during the plan year, but will more than likely “pay” at renewal time.  In addition, the carrier will more than likely not decrease your renewal pricing in a good claims year – where an experienced broker will negotiate a lower premium.

When most people refer to self-funded plans, this term is usually incorrectly used.  “Self-Funded” refers to a plan where there is no Stop-Loss insurance involved.  In most cases, the arrangement being used is “Partially Self-Funded” and is what will be discussed below.

Partially Self-Funded

Unlike the fully-insured plans discussed above, the company’s costs for a partially self-funded plan are split between a fixed portion and a variable portion.  The fixed cost includes the cost for administration and the premiums for Stop-Loss insurance.  The administration fee includes cost to adjudicate the claims, provide plan implementation, employee communications materials, and all of the administrative support required to operate a plan.  The Stop-Loss insurance premiums will be discussed later in this section.

The variable cost is the payments for claims.  Unlike a fully-insured plan where the carrier pays claims out of the premiums collected, a self-funded plan requires the company to pay for all claims like with fully-insurance plan with a large deductible.

Stop-Loss Insurance

Stop-Loss insurance is used to limit a company’s claims liability.  There are two types of Stop-Loss policies; Specific Stop-Loss and Aggregate Stop-Loss.  A company can choose to have both, one of the other, and no Stop-Loss at all (Truly Self-Funded).  The Specific Stop-Loss is a limit on claims for any one member in a plan year.  These amount per person can be any amount, but the premiums rise exponentially as the specific Stop-Loss amount drops.  Aggregate Stop-Loss is the limit that the company may pay for the plan year.  We use the word “may” because there is a limit to how much the Stop-Loss carrier will pay towards an aggregate claim.  For instance, a company may choose an aggregate limit of $1M.  The coverage may only be $1M so the company will have to cover all claims above $2M.

Maximum Liability

The Attachment Point is the level of claims that must be met before the Aggregate Stop-Loss starts paying.  The Attachment Point is determined by the Corridor which is the gap above the expected claims level.  Most Stop-Loss carriers use a 25% Corridor, meaning the Attachment Point is 25% higher than the expected claims.  A company may choose a smaller Corridor, but the Stop-Loss premiums will be increased. 

Putting It All Together

The company will get monthly invoices for the administration costs and the Stop-Loss premiums.  Depending on who is administering the plan, the company may be invoiced/ACHed for the claims costs on a regular basis or invoiced/ACHed when claims reach a certain level (e.g., every $50,000 in claims).  On e of the advantages of a Self-Funding arrangement is any renewal pricing change is only reflected in the Stop-Loss premium unlike a fully insured plan where the increase is applied to the entire premium (i.e., on the administration, overhead, and profit margin).  

For mo
re information, please contact Bridgeport Benefit Advisors.

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The material on this page is intended as general descriptions of the concepts presented.  It is for educational purposes only and it not intended to provide specific financial or tax advice.  These descriptions cannot take into account your specific conditions and situation including the data required for underwriting purposes, financial circumstances, risk tolerance, and other factors.