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Funding employee benefit risks through captive insurers a growing trend

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Multinational employee benefits were the fastest growing risk placed in captive insurers last year as companies spread their workforces across the globe, according to a new Marsh L.L.C. report.

“Benefits can be a huge cost outlay for multinationals, often exceeding property and casualty spent globally, and yet available financing options are surprisingly unsophisticated,” Lorraine Stack, business development leader for Europe, the Middle East and Africa and Asia-Pacific for Marsh's captive solutions practice, said Thursday in an email.

“Although property and casualty rates continue to stay soft, employee benefit costs are increasing; medical inflation is currently 8% globally and much higher in many parts of the world. Also, responsibility for providing benefits is shifting from governments to corporations around the world,” she said.

Out of the 1,139 captives managed by Marsh, the number using captives to reduce the cost of providing employee benefits internationally has increased by 143% in 2015, according to the Marsh Captive Solutions Benchmarking Report, released Wednesday.

“This surge in interest is “astounding” when compared with seeing no growth the year before, the report said.

“Essentially, the stars are now aligned for more growth, and we expect to see a steady increase in the number of companies adding multinational benefits to their captives over the next few years,” said Ms. Stack, who is based in Dublin. Even with the 143% growth Marsh saw in the past year, only 1.5% of its clients in the benchmarking study are currently writing the coverage, she said. However, many more Marsh clients are planning to introduce employee benefits in the near term, and Marsh estimates that 32% of its existing captive clients meet the critical-mass threshold of 10,000 employees in more than five countries, “so the potential for future growth is high,” she said.

More growth areas

Other coverages that saw substantial growth in captives were supply chain risk, up 133%, cyber liability, up 30%; political risk, up 27%; and medical stop-loss, up 14%.

“Some of today's risks, including cyber, political risk and terrorism, are evolving so fast that at times the insurance markets struggle to come up with appropriate solutions to address them,” Chris Lay, president of Marsh Captive Solutions, said in a statement Wednesday.

“Captives offer a unique solution for organizations that are struggling to find adequate insurance solutions and are a nimble tool that can quickly respond in the event of a catastrophic loss,” he said.

Recently, captives have also been spreading out globally, where they were once formed mostly in North America and Europe, the Marsh report said. Latin America, Asia-Pacific and the Middle East are three areas that saw “particularly interesting growth,” with Latin America being the fastest growing developing market for captives, the report said.

Out of the top five industries that use captives, financial institutions, health care, auto/manufacturing, retail/wholesale and communications media and technology , the latter saw a trend in growth from 2013-2015. The growth in CMT captives to 19% in 2015 from 7% in 2014 is partly from technology start-ups having few options for insurance solutions in the commercial market due to their unique needs, the report said. About one-third of Marsh's CMT captives are also accessing the Terrorism Risk Insurance Act and writing “worst-case scenarios” into their captives.