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There is an increasing appetite from multinationals to explore the benefits that captives bring when reinsuring employee benefits programmes, says Matthias Helmbold, head technical & services, MAXIS Global Benefits Network.
While the size of the employee benefits (EB) captive market remains small in comparison to the property and casualty (P&C) captives sector, there is an increasing appetite from multinationals to explore the benefits that captives bring when reinsuring EB programmes in terms of control, governance, cost reduction and data strength.
Following on from prior years MAXIS Global Benefits Network (GBN) was again involved in a significant number of EB captive arrangements in 2017 and we expect this activity to carry through 2018 and beyond.
One of the drivers behind market activity is the increasing role risk managers are playing in managing EB. Once the preserve of the human resources (HR) function, EB are more and more coming under the remit of risk and finance functions as a means to govern EB lines financially, including the ability to gain access to underwriting profits. Development of this approach has accelerated since the 2008 financial crisis.
Naturally, the majority of risk managers have a P&C background and it is apparent that many are seeking to apply common P&C approaches to the EB space. This poses interesting challenges to common EB structures.
Mode of reinsurance
Another trend that is reinforced by rising costs for letters of credit and the current low interest environment, is the way clients wish to reinsure their EB risks to their captive. Traditionally, a key reason for implementing an EB captive was to hold the assets required for the delivery of the benefit programmes at a later date.
Recently, a growing number of clients prefer to work on a funds-withheld basis instead, which allows for lower collateral requirements. This is because the reduction in costs for maintaining collateral can outweigh the expected higher returns on investments holding assets within the captive.
This preference could, of course, change once interest rates rise, something many economic commentators are forecasting. However, in recent years lower interest rates have underpinned this preference in the mindset of EB professionals.
The growing importance of health and wellbeing programmes
In many countries, medical trend adds up to three to five times the general rate of inflation, with the time taken for medical costs to double often measured in years as opposed to decades.
“MAXIS GBN is meeting the demand from multinationals for further analytics which can support the implementation and optimisation of effective health and wellness programmes.”
Multinationals are looking at ways to break this trend of increasing claims and medical cost inflation, which explains why health and wellbeing programmes have come to the fore and increasingly command significant investment. Captive structures are playing their part by centralising underwriting processes and allowing much greater control from HR and risk teams.
MAXIS GBN has been at the forefront of providing clients with comprehensive data which allow for a deeper understanding of particular cost drivers. With further services about to be launched, MAXIS GBN is meeting the demand from multinationals for further analytics which can support the implementation and optimisation of effective health and wellness programmes.
Managing pension liabilities
The use of captives to manage pension liabilities continues to be a topic, albeit still relevant only for a select set of clients and multinationals. MAXIS is fortunate that AXA, a shareholder in MAXIS GBN along with MetLife, is at the forefront of this market.
Of course, the de-risking of defined benefit pension schemes has been a strong focus over the past decade, yet a number of companies still find that captives can help them to optimise their strategy, either to pool their pension assets or to calibrate the biometric and/or financial risks they are willing to take on their books. This is supported by an increasing availability of financial instruments that allow for such calibration.
In conclusion, three advantages
Overall, by using captives to manage EB risks, multinationals are benefiting from three advantages. First, they are retaining the underwriting profit for themselves. Second, they can capitalise on the diversification benefits that this brings—EB are higher frequency, lower impact compared to P&C risks and represent a welcome diversification for risk managers.
Finally, by centralising processes they are getting much more control of their EB programmes, something that HR, risk and finance teams greatly appreciate.
MAXIS GBN, Employee benefits, Captives, Reinsurance, Matthias Helmbold, UK