Paul McNiff, Willis Towers Watson
It has been a turbulent start to 2020, with the world battling one of the most significant pandemics seen in a century and financial markets in turmoil. People have rarely faced so much uncertainty, risk and insecurity, but companies with employee benefits captives have one thing less to worry about, says Willis Towers Watson’s Paul McNiff.
The top priority for the leaders of governments and corporate institutions in response to the COVID-19 pandemic is to protect and maintain the safety, health and wellbeing of their people.
With many companies around the world suffering financially from a receding economy and finding new challenges to manage a workforce, human resources (HR), risk and finance leaders are collaborating more than ever to find new and innovative ways to support their businesses and their employees.
“A captive can serve as a data ‘warehouse’ which enables the company to develop a wealth of analytics to inform better management decisions.”
Companies with an employee benefits (EB) captive programme in place today have been leaning on the control and flexibility it affords them to support their respective businesses through these difficult times. Those without a captive continue to investigate how such a program could benefit them.
EB captive programmes grow exponentially
EB costs are significant. After remuneration and post-retirement (pension) benefits, EB typically represents the most significant financial component of an employee’s reward package. For many multinational companies, EB (which primarily include group life, accident, disability and healthcare benefits) spend often exceeds $2,000 per employee per year.
For a company with a workforce in the tens of thousands, this annual cost could easily be upwards of $20 million. For a company with a substantial presence in the US, the figure could be five times higher. It’s no wonder that, with the cost of healthcare benefits increasing at an average rate of over 7 percent per annum globally according to Willis Towers Watson’s “2020 Global Medical Trends Survey”, controlling these costs remains a top priority for most companies.
Since the mid-1990s, the prevalence of captive financing for EB has grown exponentially. Companies have become more progressive and proactive in how they deliver EB programmes and manage their associated costs. Today, more than 100 companies have implemented an EB captive programme, with the majority of these having been established in the last 10 years.
A number of factors have stimulated this growth.
- Companies have become more centralised: in particular, HR and risk/finance leaders have become more collaborative, leading to risk managers becoming more familiar with how EB programmes can bring value to their existing captive arrangements.
- There are clear advantages: there are natural cost savings opportunities in addition to the broader benefits that come with the increased control and flexibility a captive programme can provide. Willis Towers Watson’s research suggests that well managed EB captives can save upwards of 25 percent per annum in premiums versus what is available in the commercial market.
- The insurance market has evolved: the availability of the necessary expertise, services and solutions from third parties has grown to respond to the increasing demand for these programmes. For example, 15 years ago there were two global insurers that could facilitate an EB captive programme; today there are seven.
EB captive programmes demonstrate their value
The financial benefits of an EB captive programme are clear, but the non-financial benefits are often cited more loudly by established programme sponsors, due to the increased control they provide to the company.
Some of the key non-financial benefits that prove invaluable include:
- Bespoke design: a captive provides the ability to establish bespoke benefit design and underwriting terms that would not otherwise be possible through a fully insured solution.
- Governance: a captive can provide a mechanism for the company to have better oversight on how plans are delivered globally, thereby improving compliance and execution of HR strategy.
- Data and analytics: a captive can serve as a data “warehouse” which enables the company to develop a wealth of analytics to inform better management decisions.
- Claims management: a captive can support data-led initiatives to improve employee heath, reduce claims utilisation and reduce the overall cost of delivering EB programmes.
- Diversification: by combining a relatively predictable EB risk portfolio with a P&C portfolio into a single captive, the company can reduce the total level of capital required to support those risks at a group level.
- Servicing: by establishing minimum global service standards with the insurers that administer the captive arrangement, the company can improve the service levels delivered to its local entities and employees.
Use during the pandemic
The control and flexibility offered by a captive programme can be a great asset to a company in today’s fast-changing environment. In fact, Willis Towers Watson’s EB Captive COVID-19 pulse survey provides some specific examples of how companies have been using their EB captive programmes during the COVID-19 crisis.
We have listed a number of examples below.
Controlling costs: a captive can offer the ability to control and stabilise programme costs for its local entities over a period of time. This is likely to be a significant advantage to companies that are subject to increased budget constraints as a result of the broader impact of COVID-19 on their core business activities.
According to the survey, while around 80 percent of companies are expecting healthcare costs to increase over the next 12 months due to COVID-19, only around one quarter were planning to increase the premiums of the plans in their captives. This suggests many companies are using their captive to help manage cost impact for the local entities that are paying the premiums.
Maintaining protection for employees: one key issue emerging from COVID-19 is the significant number of employers that had EB plans with pandemic exclusions as part of the terms and conditions. According to the research, 80 percent of employers had gaps in coverage due to these exclusions, which was a key concern for plan sponsors.
The research also found that EB captive programme sponsors were using the underwriting flexibility of the captive to waive these exclusions and ensure employees remained covered. In fact, at the time of the survey, around half of respondents indicated that they were waiving these exclusions.
Providing additional support to employees: in recent years there has been a growing trend of companies looking to use their captives to support the health and wellbeing of employees beyond the core delivery of group life, accident, disability and healthcare benefits.
For example, there has been a significant uptake in the use of telemedicine during the pandemic. This is a service whereby employees can access certain health services online, without the need physically to travel to a health facility or doctor. The survey showed that almost two-thirds of companies were deploying this initiative to support employees through the pandemic, and around 40 percent of companies were using their captives as a means to fund it.
Limiting downside risk: clearly many EB captive sponsors may have some concern about the potential increased risk exposure to their captives as a result of COVID-19. The survey found that 14 percent of companies thought that the increase in exposure would be significant.
However, nearly 60 percent of companies had some form of reinsurance protection strategy in place to help limit this exposure. Companies that have a proactive approach to evaluating their reinsurance protection strategy would be well placed to contain any increase in risk exposure as a result of COVID-19.
As HR, risk and finance leaders continue to collaborate, and as the need to reduce costs becomes more pronounced, companies will continue to show interest in captive financing to provide more control in how they deliver EB.
We expect the number of programmes to grow sharply and the way they are used to support broader business initiatives to evolve. The depth of innovation in the EB captive market has been significant over the last two decades, and the last few months provide a fascinating and instructive peek into how this industry will continue to develop.
Paul McNiff is head of Willis Towers Watson’s employee benefit financing practice for North America. He can be contacted at: firstname.lastname@example.org
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