Businesses are seeing costs escalate, not least in the form of rising medical costs. Using a captive as a centralised risk management tool for employee benefits can help reduce these costs by enabling a comprehensive approach to global risk financing, say Aon’s Aidan Kelly and Vaibhavi Patel.
In its “2021 Global Medical Trend Rates Report”, Aon notes that employers will continue to face the prospect of rising organisational costs. The 2021 average global nominal Medical Trend Rate is projected to be lower than the corresponding 2020 global average. For 2021, the global average Medical Trend Rate is projected as 7.2 percent, compared to 8 percent in 2020. This easily outpaces the average general inflation rate for 2021 of 2 percent, (or 3.1 percent in 2020).
“Greater flexibility and improved terms for local subsidiaries are also potential advantages associated with using a captive for employee benefits.”
Rising costs and the increased prevalence of chronic medical conditions are global phenomena. Employers will continue to face the prospect of added organisational cost and reduced employee productivity unless controllable factors contributing to these conditions are effectively addressed.
Earlier in 2020, Aon forecast continued medical plan cost escalation due to global population aging, overall declining health, poor lifestyle habits, continuing cost-shifting patterns from social programmes, and heavy utilisation of employer-sponsored programmes.
The impact of COVID-19 could change the ultimate timing of when these costs are realised, as near-term increases due to greater testing and treatment may be balanced by a drop or deferral in demand for non-pandemic related healthcare. As global economies roll out of lockdown and social distancing programmes, some (but not all) of these deferred services will return, increasing future healthcare costs to pre-pandemic, or higher, levels.
Employers will want to continuously evaluate the potential impacts related to COVID-19 to appropriately manage emerging risks and ultimately develop effective return-to-work strategies.
In this evolving risk climate, innovative organisations are continuing to develop their funding strategy for employee benefits. Aon continues to witness the use of captives growing in popularity with larger and multinational employers.
There are a number of reasons to include employee benefits risk in a captive, including the diversification of risk and the resulting positive impact on capital requirements, access to underwriting margins, greater governance, and better risk management. Greater flexibility and improved terms for local subsidiaries are also potential advantages associated with using a captive for employee benefits, something which could be very relevant when it comes to addressing some of the risk-related challenges employers face today, such as COVID-19.
The pandemic in 2020 and ongoing escalation of medical costs will generate interest from risk managers to ensure that they are reviewing whether to include employee benefit risk in their captives and helping the employees of their respective organisation focus on health and wellbeing strategies. Global pandemics such as COVID-19 have demonstrated the need for better terms and conditions for employee benefits, many of which can be achieved through an employee benefit captive insurance strategy.
The optimisation of risk benefits, financial strategy and delivery mechanisms are a good place to start in addressing some of these challenges around the world. These initiatives can be facilitated with a globalised captive insurance strategy for multinational employee benefits programmes, localised solutions for specific territories and businesses or specific coverages such as medical stop loss.
These initiatives must be developed and integrated into a wider enterprise-wide solution supporting employee health and wellness including, among other things, provision of quality healthcare treatment and prevention of accidents and illnesses through better education and behaviours around overall employee health and wellbeing.
Such a global captive insurance strategic approach encompasses the following areas:
a) Financing where premiums and underwriting profits are retained within the organisation, premium leakage through segregated purchasing is decreased and diversification benefits are achievable;
b) Governance enhancements for data collection, consolidation of global service providers and standardised enrolment processes; and
c) Insurance benefits that offer greater flexibility of programme design, consistency of global coverages and greater ability to address emerging risk issues.
Aidan Kelly is director of risk finance and captive consulting at Aon. He can be contacted at: firstname.lastname@example.org
Vaibhavi Patel is senior vice president and EB captive strategist at Aon. She can be contacted at: email@example.com
Aon, Aidan Kelly, Vaibhavi Patel, Employee benefits