Help

BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.

To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.

To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.

Login Register Subscribe

Captives cut costs, add control for employee benefit risks

Reprints
Captives cut costs, add control for employee benefit risks

BOCA RATON, Fla. — Once exclusively used to fund property/casualty risks, captive insurers increasingly are being tapped by their parents to fund corporate employee benefit risks.

A key advantage is cost savings.

“When you retain benefit risks and premiums are greater than losses, you retain the profits,” said Kathleen Waslov, a senior vice president with Willis Towers Watson P.L.C. in Boston.

Those cost savings can be substantial. Funding group term insurance coverages through captives can cut costs by an average of 10% to 15%, while costs savings often are in the 15% to 25% range for long-term disability coverages, Debbie Liebeskind a senior Willis Towers Watson actuarial consultant in Parsippany, New Jersey, said during the 26th annual World Captive Forum in Boca Raton, Florida.

In addition, unlike buying coverages from a commercial insurer, the captive owner controls the design of the benefits programs funded through the captive, Ms. Waslov said.

Yet another advantage of the approach is risk diversification, with profits earned from funding benefit risks offsetting losses — when that happens — from property/ casualty lines of coverage written through the captive, speakers said.

To be sure, there are costs that employers need to factor in when considering tapping their captive insurers to fund benefit risks.

For example, the U.S. Labor Department, whose permission is required for U.S. employers to utilize their captive insurers to fund certain benefit risks, such as life, LTD and accidental death and dismemberment coverages, mandates that captives use a highly rated commercial insurer to issue policies, which in turn are reinsured by the captive.

“You have to pay a fee to the fronting insurer,” Ms. Waslov said.

And, employers have to budget in the time involved for Labor Department review of their captive benefits funding applications.

For an application that qualifies for a review process known as ExPro, the entire application and approval process can take as little as 2½ months, which is substantially faster than seeking regulatory approval through an individual exemption.

But there are conditions that have to be met — including enhancement of the benefits that will be funded through the captive — to qualify for ExPro.

Even though the Labor Department has approved close to three dozen captive benefits funding applications — mostly through the ExPro process — experts say it still isn't clear exactly by how much an employer will have to improve participants' benefits to qualify for ExPro.

“No one can tell you what will be the right level of enhancement. That has created a lot of uncertainty,” said Ted Scallet, a principal with Groom Law Group Chtd. in Washington.

Employers and their advisers, though, plan to discuss with Labor Department regulators whether they can provide more guidance to give employers greater certainty on whether a proposed benefit enhancement would be enough for a captive benefit application to qualify for ExPro, Mr. Scallet said.

Mr. Scallet said he hopes regulators will provide such guidance within a year or so.

“I hope we will have something new to talk about by the time” of the next World Captive Forum, he said, referring to possible new ExPro guidance from federal regulators.

Outside the United States, employers have been tapping their captives to fund pension plan benefits, such as by reinsuring group annuity policies purchased from insurers.

“You have more control and central cash management,” said Stacy Apter, director of global risk and investments in Atlanta with The Coca-Cola Co., which uses two of its captives to reinsure group annuity products that are written by a commercial top-rated Europe-based insurer and purchased by Coca-Cola pension plans in several European countries and Canada.

“This is a way to manage and consolidate pension risk,” said Amy Kessler, senior vice president and head of longevity risk transfer at Prudential Retirement in Newark, New Jersey.

Still, Ms. Apter acknowledges that the approach isn't for every employer.

“It is very complicated and technical,” Ms. Apter said.