EB captives in the Isle of Man

Laura Brentley of Aon reviews the state of the captive insurance market on the Isle of Man, with a focus on employee benefits.

"Rising rates often bring unbudgeted cost increases." Laura Brentley

According to Aon’s 2022 Global Risk Management Survey, the inability to attract and retain top talent is currently one of the biggest risks facing organisations globally and is expected to remain so into the future. Packaging employee benefits in a post-COVID-19 pandemic world has become increasingly challenging as employees not only seek greater flexibility in how, when and where they work, but also look to companies who align with their values and take care of their wellbeing.

There is no doubt that companies are taking wellbeing seriously and as they continue to show their commitment to diversity, equity and inclusion (DEI) within the workforce and other strategic corporate initiatives such as environmental, social and corporate governance (ESG) policies, they will need to strike the balance between the flexibility required in their long-term benefit offering and the cost in creating a successful employee value proposition.

Health and wellbeing costs have become a growing concern year on year as medical insurance costs continue to rise, with the global average medical inflation rate for 2024 expected to be 10.1 percent, up from 9.2 percent in 2023 and the highest it has been since 2015, according to the Aon 2024 Global Medical Trend Rates. These rising rates often bring unbudgeted cost increases and make affordability for employers and employees more difficult.

At this point it is worth mentioning that flexible benefit plans are increasingly been used to mitigate health costs at a global level. Not only do they serve as an enabler of change in employee behaviour, preventive care and other initiatives aimed at reducing medical costs, but they also work as a tool to deliver differentiated benefit packages which are adaptive to meet individual needs in addressing policies around DEI.

Almost all leading employers have a long-term perspective on healthcare financing, which allows them to gain insight and influence over their healthcare spend. Captive insurance vehicles are widely used risk management tools, which have long been deployed by risk managers to successfully reduce the cost of financing an organisation’s risk. Employee benefit captives in particular, can provide HR with far greater control over pricing and can facilitate the linkage between wellbeing initiatives and healthcare spend.

Employee benefit captive programmes have come a long way since the 1990s, when they were predominantly used by large multinationals which had significant health insurance premiums to reinsure. The last five years has seen exponential growth in captive formations globally with further use cases including pension de-risking.

Increasingly however, captives are being used to write master “catch-all” policies which aim to cover gaps in coverage in the local markets and a way for global employers to ensure fair treatment of benefits across their organisations. This has been particularly useful in the standardisation of benefits such as fertility care.

Master policies offer a neat solution to providing otherwise excluded benefits in the traditional insurance market, but which may align to the wider DEI strategy. Many companies are looking to their master policy to facilitate conversations around topics such as gender dysphoria.

Leveraging a captive strategy is a powerful way to deliver value to a diverse workforce and to unlock geographical complexity, while reducing the additional costs associated with insurance.

Keys to success

With everyone from small and mid-sized employers to large global conglomerates looking to set up a benefit captive, what are the key areas for the success of the strategy?

Fundamental to any captive strategy will be the key stakeholder buy-in. While captive structures are often thought to be in the realm of the risk manager and CFO, it is generally the HR team which is ultimately responsible for delivery of the employee benefit strategy. As such, HR has tended to be the purchaser of traditional pension and risk benefits within the organisation, and this is often seen as separate from any corporate insurance purchasing.

The most successful employee benefit captive strategies have been those which have been driven from the CRO/CFO and the HR director in parallel.

Second to the success of any captive is partnership. It’s important to realise that captive insurance companies are bona fide insurance or reinsurance companies and once established are subject to statutory regulatory requirements, including reporting, capital and governance. Employers who own captives are, often, not themselves insurance companies so it is vital to choose third party service providers such as fronting insurers, reinsurers, managers, and consultants who complement your own capabilities and are aligned to the long-term success of the captive.

The Isle of Man has a sophisticated financial and professional services ecosystem, regulatory excellence and central global time zone. With 65 percent of trust-based international pension plans established in the last five years being domiciled in the Isle of Man, together with a life insurance industry that has been operating internationally for more than 40 years, the island is well placed in the employee benefit space.

The Isle of Man is home to more than 100 captive insurance companies and has a robust risk-based regulatory framework with specific captive insurance regulations. The decision of where to domicile an employee benefit captive will undoubtedly be a personal choice and the financial, strategic and operational considerations must be weighed up.

For any strategy to work, it must be built on robust data and an understanding of the underlying drivers of risk. Many leading employers are looking to use claim and diagnostic data for their major healthcare plans in order to design and set appropriate benefits and premiums. As the captive matures, the wealth of data related to employee wellbeing becomes an invaluable asset to identifying trends and areas where further cost-saving measures can be implemented. Data collection, warehousing and analytics will prove instrumental in achieving success.

While employee benefit captives may offer a solution to some complex, interconnected and evolving challenges around attracting and retaining talent, it is important to realise that the captive solution is one that is designed to complement an already existing people strategy.

For more information on captive strategies in the Isle of Man, visit: www.iomcaptive.com/

Laura Brentley is client service director at Aon. She can be contacted at: laura-ashley.brentley@aon.co.im