Fully insured plans have long been the benchmark for employer coverage across the U.S., haven’t they?
They are the predictable, safe, and hands-off approach to employee benefits. You pay a fixed premium to an insurance carrier, and in exchange, they take on all the risk. If your employees have a high-claim year, the insurer is responsible for the deficit, not your company.
But as your company scales, this one-size-fits-all fully insured plan becomes restrictive and inefficient. You are forced to subsidize the risks of higher-claim organizations and lose all transparency into your spending.
At this stage, companies often transition to an excess strategy. It’s more transparent and often cost-effective.
But how do you know if you’re ready to make the leap? Let’s walk you through the key signs that it’s time to switch from fully insured to an excess strategy.
Difference Between Fully Insured and Excess Strategy
The fundamental difference between these two models lies in who owns the risk and who keeps the profit.
Fully Insured
In a fully insured plan, you pay a fixed monthly premium to an insurance carrier. They assume 100% of the risk.
If your claims exceed what you paid, the carrier loses money. However, if your employees have a healthy year and claims are low, the carrier keeps the surplus as profit. You gain predictability but lose transparency and any potential savings.
Excess Strategy (Self-Funded)
In a self-funded or excess insurance model, employers pay for their own claims out of their own pocket instead of paying a high premium to an insurance company.
That is to say, employers pay their own claims directly until they hit a pre-set spending cap, after which the insurance company steps in to cover the claims.
According to Prescient National, the benefit of excess insurance is that it allows for real-time claim settlement while enabling you to capture the liquidity benefits of unpaid loss reserves.
Key Signs It’s Time to Switch to an Excess Strategy from Fully Insured
Here are some key signs that indicate it’s time to switch to an excess strategy from fully insured:
1. Your Claims History is Too Good
The first and perhaps most compelling sign that a business should move to an excess strategy is a consistently good claims history.
The insurance industry measures this by the medical loss ratio (MLR), which is the ratio of actual claims paid to the total premiums collected.
In a fully insured arrangement, the Affordable Care Act (ACA) requires carriers to maintain a medical loss ratio (MLR) of at least 80% to 85%. This mandate ensures that for every dollar collected in premiums, insurers must spend $0.80 to $0.85 directly on medical care or quality improvements.
Say, your actual claim only accounts for 60% to 70% of your total premiums. Then, you are inadvertently providing your insurance carrier with an exceptionally high profit margin.
If your company has healthy employees, marked by younger age demographics, active wellness participation, or low chronic disease rates, your risk profile is naturally lower. That makes you a prime candidate for self-funding, so you don’t overpay for traditional, fully insured premiums.
2. Your Insurance Premiums Are Increasing Every Year
It is not uncommon for a fully insured business to receive a renewal increase despite having a relatively quiet year for claims.
A 6% to 7% increase might seem manageable in a single year. But the compounding effect over a 5-to-10-year period can be devastating to your company’s bottom line.
The health insurance industry is currently struggling with a major drop in profits. In 2024, earnings plummeted from $25 billion to just $9 billion, leaving insurers with a tiny 0.8% profit margin.
This happened because medical costs have jumped nearly 9% as hospital visits and healthcare wages have gotten much more expensive. To make up for these losses, insurance companies will almost certainly raise premiums for their clients.
Rates can jump 10% to 15% simply in fully insured plans to offset losses from other groups in the carrier’s pool. But you can ensure your premiums are based solely on your own claims experience if you move to an excess strategy.
3. Your Company Has Hit a Certain Headcount
Your company’s headcount matters in insurance because of the law of large numbers. It’s a theorem that describes the result of performing the same experiment a large number of times.
In healthcare, as the number of employees in a plan increases, the actual claims will tend to get closer to the expected average.
If your company is very small (e.g., 10 employees), one major medical event, such as a premature or preterm birth, could cost $500,000 or more. This would be catastrophic for your cash flow. However, as the headcount grows to 50, 100, or 250 employees, the risk becomes more credible and predictable.
Historically, self-funding was reserved for jumbo employers with thousands of workers. However, the market has evolved to offer solutions for smaller groups.
So, if you cross the 50, 100, or 250 headcount threshold, your company’s mathematical profile changes. You can move away from being a passive insurance consumer and take full control over your healthcare costs and plan design.
Switching from fully insured to an excess strategy isn’t something you do overnight, and it’s certainly not something you do alone. It requires a brave HR team, a numbers-oriented chief financial officer, and a broker who knows how to navigate the stop-loss market.
But the rewards? They are huge. You could lower deductibles for your staff, add a dental super-benefit, or simply reinvest that money back into your company’s growth.
So, if you’re looking at your current renewal and feeling like you’re paying more for less, it’s worth running the numbers. You might find that the safety of your current plan is actually the most expensive thing you’re buying.
