A Focus on Unlocking International Employee Benefits in Captives

The 2017 Bermuda Captive Conference panel titled "Captives and Employee Benefits—Change That Unlocks New Value and Control" convened with the primary focus of discussing international employee benefits. This article summarizes what the panel participants said about the current environment of international employee benefits in captives and the types of employee benefits coverage multinational organizations put into their captives.

To open, the panel briefly touched on employee benefits in the United States and explained that US employee benefits have been more difficult to bring into captives relative to the bureaucratic and expense aspects involved with obtaining Department of Labor approval. The panel reported 31 companies currently finance US employee benefits in their captives. (Editor's Note: A Captive.com reader has pointed out that 31 captive parent organizations have had their captive employee benefit funding applications approved by the US Department of Labor. However, the reader reminds us that not all benefit-related coverages, such as stop-loss insurance, need Department of Labor approval to be funded through captives. The most recent activity includes the Department of Labor's 2016 approval of Laclede Gas Company's captive benefit funding application. Prior to this, in 2015, the Department of Labor approved three captive benefit funding applications: Hormel Foods Corporation, Sealed Air Corporation, and Healthcare Services Group, Inc. (HCSG).)

By comparison, according to the panel, financing global employee benefits in captives does not present the same bureaucracy and expense as it does in the United States. The panel projected that the industry can expect to see a total of 100 to 200 companies with global employee benefits risk in their captives within the next few years.

The Current Environment of International Employee Benefits in Captives

Barry Perkins of Mercer's multinational client group said that there is a significant level of interest from clients seeking to better understand if it makes sense to insure employee benefits in their captives. As employee benefits coverage is typically a very high cost item for organizations, the move to finance employee benefits risks within captives is often driven by a desire for cost savings.

In Mr. Perkins's view, the market is maturing and financing global employee benefits in captives is now seen as a mainstream opportunity. He expects that the market of available insurers that work with captives on their global employee benefits program will broaden beyond the current four (Maxis, Generali, Allianz, and Zurich).

On a broader transformational level, Mr. Perkins said that there is a change in the way human resources operates as a corporate function (global or regional basis versus local). As a result, benefits are provided within a framework centered on managing and improving the overall health of an increasingly globalized workforce over the long term. Mr. Perkins continued, saying that while a captive insurer is not the only way to accomplish this, it is certainly considered to be a tool for contributing to this objective. Specifically, using a captive as a tool to this end is most successful when the human resources department is engaged in the high-level objectives of the captive structure.

Marc Reinhardt, director of Generali's Americas employee benefits, explained that prior to about 10 to 15 years ago, (larger) clients pooled their global employee benefits risks through multinational pooling arrangements. As their understanding matured, they sought other options to assume and control risk and manage employee benefits in a different way and now captive business makes up a significant part of employee benefits globally. Mr. Reinhardt advised that the captive route has not been an avalanche or spur-of-the-moment but rather a very deliberate process.

Larry Howley of the Met Life/Maxis Group said that captives make up the majority of his organization's global employee benefits portfolio. Typically, he sees multinationals taking an acclimation or stairstep approach from starting with a pool, transferring risk to an insurer, and then moving more and more risk into a multinational captive solution over time as risk appetite increases. A multinational may begin by obtaining the insurer's guidance on reporting requirements and maintain limited up-front risk while it gets a feel for its entire global employee benefits, optimizes its underwriting process, and finally moves to a full captive arrangement.

What Lines of Employee Benefits Cover Are Being Put into Captives?

According to Mr. Reinhardt, all of the traditional employee benefits insurance lines are put into captives, including basic life insurance, medical and health insurance, disability, accident, and pensions. Generally, what is put into a captive varies globally from country to country. Mr. Reinhardt said that relative to reinsurance in a captive, it is less about the actual line of coverage and more about pricing it properly.

Mr. Reinhardt said that while there is no line of coverage excludable by definition, certain lines of employee benefits cover, such as non-life, are less volatile and that disability can be more challenging due to reserves management over time. He also shared that a major challenge with medical insurance is keeping ahead of medical inflation trend.

Mr. Howley said that from a high-level underwriting approach and in context of market-accepted loss ratios, he has observed life insurance operating at around a 50 percent loss ratio over the lifetime of a contract and has observed medical insurance operating at around an 80 percent loss ratio, which includes an annual adjustment for medical trend at each renewal.

Accident and total permanent disability tend to be the most profitable coverages, although the premiums are smaller, according to Mr. Howley. He continued, saying that long-term disability is typically reviewed on a market-by-market basis and should be profitably priced and carefully assessed, particularly around reserve requirements that vary from market to market. In general, the captive reinsurers Mr. Howley works with tend to view life insurance as the most profitable, although it is less predictable and more volatile than standard medical insurance.

Mr. Perkins explained that, generally, organizations are most concerned about bringing medical insurance into their captive in terms of cost savings. However, he said that determining what to finance in its captive depends on an organization's objectives.

For instance, he said that a cost savings objective might lead to moving medical insurance into the captive without changing the risk or the existing commercial pricing. However, organizations typically are also looking to manage risk better, which, for medical risk insurance and disability insurance, actions can be taken to favorably impact claims experience. Mr. Perkins said that this translates into cost savings further down the road as risks are being managed over time for a better outcome, including claims and premium reduction.

Mr. Perkins said that while most organizations look at the insurance risks mentioned by the panelists (above) when they are considering employee benefits in their captive, pension plans are also considered for inclusion (in captives). With pension plans, generally, decision making is on a country-by-country basis subject to the specifics of the market, according to Mr. Perkins.

He continued, saying that organizations typically hold pensions on their balance sheet or externally in a trust. However, interest in de-risking its balance sheet and trying to remove pension liabilities often lead an organization to put its pension liabilities in the external insurance market. Mr. Perkins said, once at this point, the organization may explore funding pensions in a captive as opposed to transferring the liability to the external insurance market. However, Mr. Perkins advises that there is a very specific set of ingredients that should exist in order for this to make sense. These ingredients are as follows.

• The organization desires to release surplus.
• The organization is comfortable taking on pension liabilities.
• The organization is ready for significant investment risk and longevity risk.
• The organization feels it is able to manage pension risk better than an insurance company.

(Photo above of, from left, panelists Larry Howley, Marc Reinhardt, and Barry Perkins is courtesy of the Bermuda Captive Conference and used with permission.)