Bermuda captives are being introduced to a new strategy to battle the rising cost of healthcare and address the persistent challenge of medical expense inflation.

Rajeev Dutt, principal and consultant actuary at Milliman FRM returns to the island this month for further talks on financial products designed to help investors and others hedge against the persistent rise of US healthcare inflation by tracking medical cost trends.

Milliman in April launched two new exchange-traded funds that function as a derivative-style hedge, using a proprietary index and a basket of healthcare stocks to correlate investment returns with rising medical trends.

Retirees are also being invited to use Milliman’s healthcare investment ETFs — specifically the Milliman Health Insurance Guard and Milliman Health Insurance Plus — as specialised tools to protect retirement savings from the rising cost of medical services.

Healthcare typically accounts for about 15 per cent of a retiree's total costs, and these expenses often rise annually at rates that outpace general inflation.

Mr Dutt said that by investing in these publicly traded ETFs, retirees can aim to maintain the real purchasing power of their savings.

For example, he said, if a retiree sets aside $5,000 for next year's premiums, placing those funds in an ETF that grows in tandem with medical inflation helps ensure that the money remains sufficient to cover those costs when they eventually come due.

Mr Dutt has been travelling to meet with reinsurers and insurance companies. He said he had consulted with colleagues in Milliman’s Bermuda office.

He said: “They thought captive owners would be interested and easily be able to look at the experience of their members over the last year.”

He said they will remove one-time payments from the equation, adjust for any benefit enhancements or reductions and come up with a cost.

“But that will be based on last year's dollars,” he said. “So then they will go to their in-house actuary and ask what the trend is expected to be.

“Now, trend is inflation, but it's also the utilisation of drugs. So certain drugs are used now for other purposes. And inflation might be 10 per cent on that drug.

“They'll ask what the trend is going to look like, their particular trend rather than inflation. And those actuaries may subscribe to Milliman's health trend guideline. A vast majority of the US carriers actually do subscribe to that.

“That gives them some indication, gives a three to six-month forward look. They then come up with their best estimate of increased costs.”

Members are charged, starting with such analyses and inflation estimates, but if they get it wrong and undercharge, they are forced to suffer the added expense.

He said: “I heard this again and again, were they are hoping they get it right the following year.

“This was, ‘let's hope for the best’. So there had to be something else that we could do here.”

The ETFs are far more useful because they are tracking that inflation, using the results from some 70 publicly traded companies as data.

The funds track the Milliman Health Trend Guidelines, a massive database that monitors the actual medical costs of about 60 million insured people across the United States. The data tells fund managers exactly how much healthcare costs are rising in real-time.

The tracked companies include pharmaceuticals and medical device manufacturers whose stock performance often reflects the dollars spent on healthcare inflation.

To reduce volatility and improve risk-adjusted returns, the strategies include allocations to gold and actively managed treasuries, which helps retirees avoid the “whipsaws” of the broader market while specifically targeting medical cost trends.