Buying Down An Aggregate Corridor

Many political subdivisions self-fund their employee health plans. In fact, most do. Few fully understand self-funding and many have no clue at all why they are doing so. Elections come and go, new trustees are elected who inherit past decisions, including the decision to self-fund made years ago by informed predecessors. In the process, perception  sometimes become clouded and delusional.

“Let’s go to bid, our health costs are going through the roof!” is a familiar tune. “Our TPA is screwing us, our claims are terrible. May the low bid get the business!”

So what is “low bid” to some in regards to a self-funded group medical plan? “Why, its worst case scenario your Moron! How much will we have to budget for in a worst case scenario with large on-going catastrophic claims, that is the question!”

A wise and seasoned group sales representative preys on groups like this. Ignorance is bliss it seems. “Your decision to purchase is based on worst case scenario?” asks Johnny “The Closer” Smyth. “Ok, I will have the lowest bid, bar none, guaranteed!”

It’s all about stop loss insurance. Aggregate insurance in effect provides a group unbrella policy that caps claims for the group. The aggregate retention is usually set at 25% higher than expected claims, although sometimes an underwriter will agree to lower that to 115% or 110% of expected (rarely done). Aggregate cover is cheap because exposure is low. Aggregate cover is a poor buy, especially for larger groups.

In comes “The Closer.” Johnny finds a side carrier to buy down the aggregate corridor to 105% of expected. Since aggregrate policies are usually limited to $1 million in cover, with a 5% corridor and a $350,000 premium, some underwriters salivate at the prospect of writing this worthless coverage. But, by adding this policy to his proposal, Johnny now has a bid that is 20% “cheaper” than his competition (to heck with fixed costs, not important to uneducated trustees).

Buying down aggregate corridors is dumb. But, if the client wants to buy it, who is to say we should not sell it to them?