The Rising Challenge of Insurance Costs for Contractors
Over the past several years, contractors and small business owners have faced a relentless surge in insurance costs. Whether it’s property and casualty, general liability, or workers’ compensation, premiums are climbing, squeezing already tight margins and making it harder for businesses to stay afloat. For many, insurance has become the second largest expense after payroll, and the frustration is palpable: “Insurance has been just destroying us and rising costs. We don’t know what to do.”
But what if there were alternative strategies to manage these costs—approaches that not only stabilize premiums but also give business owners more control and even the potential for profit sharing? Enter the world of self-funding, captives, and a new era of insurance consumerism.
This article explores the insights shared by Rich Hess, a seasoned insurance executive with Plexus Group, as he demystifies the insurance landscape for contractors and small business owners. We’ll break down the key concepts, practical strategies, and future trends that can help you take back control of your insurance destiny.
Understanding the Insurance Landscape
The Traditional Model: Fully Insured Plans
Most small businesses, especially those with fewer than 50 or 100 employees, are “fully insured.” This means they purchase off-the-shelf insurance products from major carriers—often referred to as the “BUCAs” (Blue Cross, United Healthcare, Cigna, and Aetna). These plans are easy to buy but offer little flexibility or negotiating power. The insurance company sets the price, and the employer pays it, often with little understanding of how the costs are determined or how to influence them.
The Problem with the Status Quo
The fully insured model leaves small businesses at the mercy of annual rate hikes. As claims increase—often due to employees’ lack of awareness about healthcare costs—premiums rise. Employers are forced to make tough decisions: cut benefits, raise deductibles, or absorb the cost and hope for a better year.
But there’s a catch: insurance companies are not benevolent. They are in business to make a profit, and they do so not just from premiums, but also from investing those premiums and managing claims in ways that maximize their bottom line.
Beyond the Basics: Self-Funding and Captive Insurance
What is Self-Funding?
Self-funding is a model where the employer pays for claims out of their own funds, rather than paying premiums to an insurance company. This approach is more common among larger employers but is increasingly accessible to smaller businesses through creative plan designs and risk mitigation strategies.
The Bridge Plan: Managing Deductibles
One popular self-funding strategy is the “bridge plan” or “donut hole” approach. Here’s how it works:
- The employer raises the deductible on their insurance plan (e.g., from $1,000 to $5,000), which lowers the premium.
- The savings from the lower premium are set aside in a separate account.
- When employees have claims that fall within the deductible gap (e.g., $1,000 to $5,000), the employer pays those claims directly from the savings account.
Statistically, only a small percentage of employees will need to use this fund, so over time, the employer often comes out ahead, building a reserve that would otherwise have gone to the insurance company.
The Power of Captive Insurance
Captive insurance takes self-funding to the next level by pooling the risk of multiple employers—often across different industries and geographies—into a single entity. This collective approach offers several advantages:
- Buying Power: By joining a captive with thousands of lives, a small business gains the negotiating leverage of a much larger group.
- Rate Stability: Instead of being rated solely on their own claims experience, employers in a captive benefit from the stability of the larger pool.
- Profit Sharing: If the captive’s claims are lower than expected, the surplus is returned to the participating employers as a profit share.
- Access to Better Pricing: Captives can negotiate lower administrative fees and stop-loss insurance rates than individual small businesses could on their own.
How Does a Captive Work?
- Employers submit their census data (number of employees, ages, etc.) to the captive manager.
- The captive manager provides a rate based on the group’s overall risk profile.
- Employers pay a portion of their premium as collateral—a kind of deposit that serves as an emergency fund.
- Claims are paid from the collective pool, with stop-loss insurance covering catastrophic events.
- At the end of the year, if claims are lower than expected, employers receive a share of the surplus.
Overcoming Misconceptions and Barriers
“I Don’t Understand It” and “It’s Too Risky”
The biggest pushback against captives and self-funding is a lack of understanding and fear of risk. Many small business owners are overwhelmed by the complexity and worry about taking on additional financial exposure.
But as Rich Hess points out, entrepreneurs are already accustomed to risk. The key is education and risk mitigation:
- Stop-Loss Insurance: This coverage limits the employer’s exposure to large claims, ensuring that catastrophic events don’t threaten the business.
- Data-Driven Decisions: By analyzing claims data and understanding where costs are incurred, employers can make informed choices about plan design and risk tolerance.
- Consultative Approach: Working with a knowledgeable consultant or broker can help demystify the process and tailor solutions to the company’s unique needs and culture.
The Importance of Employee Education
A major driver of rising healthcare costs is employee behavior. Most people don’t know how much medical services cost or how to shop for better prices. The insurance industry has, intentionally or not, created a system that discourages transparency and consumerism.
Employers can combat this by:
- Educating Employees: Teach staff to ask about costs, use telemedicine, and seek out lower-cost providers for routine care.
- Leveraging Tools: Encourage the use of services like GoodRX for prescriptions, and comparison shopping for diagnostics and procedures.
- Rewarding Smart Choices: Some plans offer incentives for employees who choose cost-effective care, further aligning interests.
Real-World Success Stories and Lessons Learned
Captives in Action
Most employers who join a captive end up staying—and thriving. The benefits are tangible:
- Stabilized Rates: No more wild premium swings year after year.
- Profit Sharing: Employers receive checks when the captive performs well.
- Greater Control: Plan designs can be customized to fit the company’s culture and workforce needs.
One exception: if a company has a known, high-cost claimant (such as a hemophiliac requiring expensive medication), it may make sense to remain fully insured for a period. But for the vast majority, captives offer a path to long-term savings and stability.
The 5:1 Ratio: Understanding the Risk
Insurance is a numbers game. Statistically, most employers will have one “bad” claims year out of every five. The other four years, they come out ahead, building reserves that can offset the occasional spike. The key is to plan for the long term and not panic when a bad year happens.
The Value of a Consultative Approach
Not every solution fits every business. A good consultant will:
- Analyze your data and claims history.
- Understand your company culture and goals.
- Recommend the right mix of fully insured, self-funded, or captive solutions.
- Redirect you if a particular approach isn’t a good fit.
This personalized approach ensures that benefits align with what employees value and what the business can sustain.
The Future of Insurance: Technology, AI, and Consumerism
The Role of Technology and AI
The insurance industry is on the cusp of a technological revolution. Artificial intelligence is already being used to:
- Audit Claims: AI can analyze claims data and flag overcharges, ensuring that employers pay fair prices for services.
- Price Transparency: New tools are making it easier to compare costs across providers, empowering employees to make smarter choices.
- Streamline Administration: Technology reduces administrative overhead, freeing up resources for more strategic initiatives.
The Rise of Consumerism
As employees become more educated and empowered, they are starting to behave like consumers in other markets—shopping for value, comparing prices, and making informed decisions. This shift is essential for controlling costs and driving innovation in plan design.
Adapting to Demographic and Market Changes
With an aging workforce and evolving risk profiles, captives and self-funded plans are adapting by:
- Offering Flexible Plan Designs: Tailoring benefits to the needs of different employee groups.
- Incorporating Wellness and Preventive Care: Investing in programs that keep employees healthy and reduce long-term costs.
- Leveraging Data Analytics: Using claims data to identify trends, target interventions, and negotiate better rates.
Practical Steps for Contractors and Small Business Owners
1. Assess Your Current Insurance Program
- Review your current premiums, deductibles, and claims history.
- Identify areas where costs are rising or benefits are not meeting employee needs.
2. Explore Alternative Funding Models
- Consider whether a bridge plan, self-funding, or captive might be a good fit.
- Consult with an experienced broker or consultant who understands these models.
3. Educate Your Employees
- Launch a communication campaign to teach employees how to be smart healthcare consumers.
- Provide resources for price comparison, telemedicine, and prescription savings.
4. Leverage Technology
- Use claims analytics to identify cost drivers and opportunities for savings.
- Explore AI-powered tools for claims auditing and price transparency.
5. Plan for the Long Term
- Understand that insurance is a multi-year strategy.
- Build reserves during good years to weather the occasional bad year.
- Revisit your plan design annually to ensure it continues to meet your needs.
Special Considerations: Property and Casualty Insurance
While much of the discussion focuses on health insurance, similar principles can apply to property and casualty (P&C) insurance. Rising construction and replacement costs have driven up premiums for real estate and rental property owners. While the specifics differ, the core idea remains: pooling risk, leveraging buying power, and seeking out alternative structures can help manage costs.
If you’re a property owner or investor, consult with a P&C specialist to explore whether group purchasing, captives, or other innovative solutions are available in your market.
Lessons from the Field: Mistakes and Growth
No journey is without its missteps. Rich Hess shared a candid story about leaving the insurance industry to buy a franchise in the graphics and sign business—without seeking help or understanding the nuances of the new field. The experience was humbling but invaluable, teaching lessons about the importance of preparation, relationships, and adaptability.
The takeaway for contractors and business owners: Don’t be afraid to seek advice, learn from mistakes, and build relationships that can help you navigate complex challenges.
Conclusion: Taking Control of Your Insurance Future
Insurance doesn’t have to be a black box or a runaway expense. By embracing education, consumerism, and alternative funding models like self-funding and captives, contractors and small business owners can regain control, stabilize costs, and even share in the profits of prudent risk management.
The key is to approach insurance as a strategic investment, not just a necessary evil. With the right partners, tools, and mindset, you can build a benefits program that supports your business, attracts top talent, and stands the test of time.
If you’re ready to explore your options, reach out to a knowledgeable consultant, analyze your data, and start the conversation. The future of insurance is changing—make sure your business is ready to change with it.
