5 August 2016USA analysis

Primary use of nearly half of employee benefit captive insurers is to improve claims data: Willis Towers Watson

The primary function of almost half (44 percent) of captives that underwrite employee benefits business is to control and improve their claims data and improve cost management, according to a study by Willis Towers Watson (WTW).

This is a big increase on a year before when just under a quarter (24 percent) of captives identified this as their primary function, the study showed.

The relevance of captive insurance companies for financing employee benefits continues to evolve as companies increasingly go beyond using their captive vehicle purely to save money on their annual employee benefits bill, the firm said.

The study also shows that the proportion of companies for which the main driver is cost savings dropped from 67 percent in 2015 to 44 percent in 2016.

“There has been a clear evolution in the rationale for companies to include employee benefits in their captives,” said Mark Cook, director at WTW.

“The initial motivation for using a captive is often the simple desire to save money on the ever increasing cost of providing employee benefits.

“For some companies these ongoing cost savings are all they require from their captive, but many are developing their use and finding additional benefits.

“We see more and more companies using their captive as a strategic tool to manage risk and benefit costs proactively and to analyse claims data to identify and address key cost drivers.
Many also look to employee benefits as a source of diversification to more traditional lines of risk typically included such as property, casualty or business related risks.”

Over half of the employee benefit captives have contributed to WTW’s poll worldwide as part of its specialist Captive User Group forum, held in London and New York in May and June. The study found that half of those that answered the questions use their captive vehicle to provide death and disability benefits as well as healthcare or medical benefits.

Proactive risk management was also shown in the influence which employee benefit captives have over pricing, with half indicating that their captive has full determination or significant influence over pricing rather than relying solely on local insurers’ underwriting.

Looking forward, nearly half of the employee benefit captive users (47 percent) have shown that they are also thinking about a captive pension transaction, either in the next three to five years (41 percent) or within the next 12 months (6 percent).

Cook added: “We continue to see a broadening use of employee benefit captives. Companies continue to explore further areas in which they can take on more of the risk and manage it internally, in order to save money and mitigate risk.

“Also many companies now recognise captives’ importance as a tool in benefit cost management, by identifying and addressing the key cost drivers.

“Successful employee benefit captives are able to stabilise and slow down the increase in benefits costs, in an environment where medical costs continue to increase.

“Our own Global Medical Trends report from earlier in the year shows that the average global health insurance premium increased 7.5% in 2014, 8% in 2015 and is estimated to grow by over 9% this year. Captive users recognise this trend: over three-quarters of those we questioned had noticed a trend towards increasing medical insurance claims among their employees. So the savings available to companies who run a successful benefits captive can be significant.”