Lorraine Stack, Marsh
4 December 2020Actuarial & underwriting

Including employee benefits in a captive after the pandemic

As the COVID-19 pandemic lingers, it is not surprising that captive owners are continually looking for new ways to use their captives. With medical costs continuing to rise, one especially attractive option is to deliver employee benefits to global workforces.

Here’s why that approach might be right for you.

Efficiency, flexibility, and diversification

A captive insurance company can be used to underwrite a variety of life, health, and disability offerings for employees. Historically, multinationals have chosen to use their captives to write employee benefits for a few reasons—and the rationale for such a strategy is especially clear given the ongoing economic challenges for global businesses.

Foremost is efficiency: using a captive can help an employer better control pricing and eliminate frictional costs, including those associated with the annual benefits broking and placement cycle. A captive-centric approach—rather than relying on various local insurers—can also allow an employer to centrally manage and have greater insight into its benefits claims activity around the world.

“Robust employee benefits programmes can be a valuable differentiator when it comes to attracting and retaining top talent.”

A second reason is breadth of coverage. Robust employee benefits programmes can be a valuable differentiator when it comes to attracting and retaining top talent, especially during times of economic hardship. A captive can support this by allowing an employer to customise the design of its benefits programme and provide employees with coverage that may not be commercially available in all locales.

Multinational employers, for example, have often had difficulty securing coverage from commercial insurers for HIV and AIDS in Africa, but can choose to offer such coverage to employees via a captive.

Writing employee benefits can also present an opportunity for a captive to diversify its risk. Similar to workers’ compensation, employee benefits tend to be a high frequency/low volatility line of coverage. As such, adding benefits to a captive’s portfolio can potentially lead to greater stability and help mitigate capital volatility in some jurisdictions.

A valuable post-pandemic mechanism

The COVID-19 pandemic’s health impacts have further underscored the potential advantages of writing employee benefits via a captive, particularly as a means to reduce costs.

As of November 30, 2020, more than 62 million COVID-19 cases had been reported globally, according to the World Health Organization. While the coronavirus has affected people of all ages, it has had an outsize effect on older people who are no longer in the workforce. Also, the cost of care has largely been borne by world governments rather than employers and commercial insurers, which have experienced a dip in claims activity this year.

This lull in claims, however, is likely to prove temporary. Claims activity is expected to pick up again in 2021, when many elective procedures that have been postponed because of the pandemic will proceed, and medical inflation was already a significant long-term concern before the pandemic. As such, many employers are preparing for an increase in commercial market pricing for employee benefits coverage next year and beyond.

Moreover, captives have served as a means for delivering critical benefits to employees affected by the pandemic.

As the coronavirus emerged as a global health threat, many multinational employers sought to review their employee benefits placements worldwide and identify potential gaps in coverage—and they often found significant disparities between countries. Fortunately for global workforces, employers by and large sought to act quickly to provide employees with sufficient protection.

“Many employers are preparing for an increase in commercial market pricing for employee benefits coverage next year and beyond.”

But it is captive parents that have been best positioned to meet that goal. Captive owners have often been able to go above and beyond for their employers, filling critical gaps in public health schemes and providing supplementary coverage—including additional indemnity protection and concierge services—for employees who have been hospitalised because of COVID-19.

Looking ahead, a captive can provide its parent with a cushion against volatility in employee benefits pricing, just as it can help protect against volatility in pricing for property and casualty coverage. A captive may also enable an employer to provide consistent, baseline coverage to a global workforce—an approach that is simply not possible for employers that purchase benefits coverage from commercial insurers.

A well-funded captive can also allow employers to sponsor specific benefits programs for which cash-strapped organisations may otherwise not have the capital to pursue. These include mental health programmes, remote solutions, and digital health solutions—all of which are expected to be in high demand in the coming years, in part because of employers’ and employees’ experiences during pandemic-related lockdowns.

Is the view worth the climb?

A survey of more than 1,000 captives managed by Marsh globally, The 2020 Captive Landscape Report: Captives Offer Value in Uncertain Times, found that 9 percent are already writing employee benefits, while another 37 percent are currently considering or likely to consider doing so.

Many employers can realise significant benefits from writing employee benefits via captives, but careful planning is needed before making any decision. And it may not be the right approach for every employer.

Captives have a long history of writing property and casualty risks, including business interruption, all-risk property, umbrella and excess liability, and cyber insurance. Managing these risks, however, is fundamentally different from managing benefits programmes. That’s because most multinationals purchase a global master policy for P&C risks, typically supplemented by a handful of local policies; the risk tends to be centralised through the master policy, which can often be written more efficiently by a captive.

For employee benefits, the captive underwriting process can be more complex. There is no global master policy, as varying regulatory schemes in individual countries generally make such an approach impractical. Instead, every benefits policy is placed locally; depending on their global footprint, some employers will need to manage hundreds of distinct policies. Such contracts can be consolidated through multinational pooling networks before being reinsured via a captive.

Starting the journey

An assessment of existing programmes, claims history, and more—conducted by an experienced and knowledgeable benefits manager—can help an individual employer determine whether funding benefits through a captive makes financial sense. Generally, however, economies of scale are needed to realise value—the more you put into the captive, the better the savings. It is important to keep in mind that benefits programmes for some countries will need to remain independent, because of regulatory requirements or for other reasons.

Pooling networks, meanwhile, also have minimum requirements. As such, using a captive is generally recommended only for multinationals that meet specific thresholds—typically, at least $5 million in premium and 10,000 employees across five countries or more.

Beyond such qualitative criteria, a strong relationship between critical stakeholders is essential. While risk professionals are accustomed to managing global property and casualty programmes, the expertise of human resources can be invaluable if a captive is to add benefits to its portfolio.

During a time of great uncertainty for many global businesses, the efficiency and flexibility afforded by a captive-centric approach to benefits can help multinational companies better manage costs, deliver consistent enhancements to employees, and attract and retain talent.

As strong interest in using captives to fund benefits continues, now is the time to talk to your insurance and benefits advisors about whether a captive is the right strategy for your organisation.

Lorraine Stack is a managing director and international advisory and sales leader at Marsh Captive Solutions. She can be contacted at: lorraine.f.stack@marsh.com