Deutsche Post A.G. didn't set out to break new ground when it established its Bermuda-based captive, Marias Falls Insurance Co. Ltd., in 1984. The captive insurer was set up in response to the hard market for U.S. workers compensation insurance at the time, said Hugh O'Neill, the Bonn, Germany, delivery giant's senior vp, insurance and risk management. It eventually became clear, however, that the captive would be well-suited to fund Deutsche Post's employee benefit coverages. The company, which now operates after numerous acquisitions under the brand Deutsche Post DHL, began a pioneering effort in 2002 to fund those coverages in a captive for its far-flung global network of delivery operations. Mr. O'Neill spoke with Business Insurance Senior Editor Michael Bradford about the evolution of Marias Falls and how its success saves his company millions of euros each year.

Q: When did you become involved with Marias Falls?

I came along in 1988. I took over the risk function at DHL in the early 1990s and began to grow the captive to become the central risk financing vehicle for the group.

Q: Why did you take that approach?

We had a huge range of frequency exposures and very few catastrophe exposures—a perfect fit for a captive. A captive could operate effectively at lower costs compared to the traditional insurance market.

Q: How did Marias Falls expand over the years?

In 2002, DHL was acquired along with other companies by Deutsche Post. Marias Falls was operating global insurance programs and had a range of insurance products that happened to fit the nature of exposures and logistics activities of the growing company. So we were invited to roll the risk exposure of other companies Deutsche Post had acquired into the captive strategy. One of the bold decisions that was made at the time was to finance employee benefits in the same way property/casualty was financed. We decided that life, medical, disability and other benefits would be funded in the captive.

Q: Were you going out on a limb at the time by financing benefits in a captive?

We weren't really going out on a limb. The thought process at the time was that we have a captive writing noncatastrophe, property/casualty frequency exposures. At the time the benefits insurance process was (handled) through human resources, the procurement (was made) through the normal insurance market for life and medical coverages. It had the same profile—high-frequency spread over many jurisdictions. But if you called it employee benefits, it was in the local market. If it was property/casualty insurance, most of the big companies used captive insurance to finance it. We said, “Why is that the case? It's still noncatastrophe business.” The insurance market at the time said no one had done it before and what we really wanted was a pool. We didn't want a multinational pool; we wanted to assume the risk and set the front-end price.

Q: Were you the first to fund benefits through a captive?

There certainly was not a global program like ours doing it. We had benefits in more than 100 countries. No one had tried it with a global program.

Q: Were there regulatory hurdles, as you were a pioneer in this area?

No, the regulatory regime was relatively flexible. It's slightly different in the U.S. because the Department of Labor is one of the regulatory bodies, but other than that, the regulatory constraints were fairly few. The problem was not of a regulatory nature: It was of a skills nature and experience. The problems we encountered were more a lack of experience in the life and benefits business. The benefits insurance networks had not done this before and were not familiar with captives. They were familiar with pooling agreements. It took about a year, but once their hearts and minds were in it, it was just a question of rolling it out.

Q: How much does Marias Falls save Deutsche Post in insurance costs?

It saves around e100 million ($136.2 million) per year to insure through the captive rather than buy insurance in the traditional market. Employee benefits in the captive save something like e13 million ($17.7 million) per year.

Q: Do you operate other captives?

We have six. They have been acquired mainly through acquisitions of other companies. We are consolidating those.

Q: What are the biggest challenges faced by captive owners?

There obviously is a lot of focus on the regulatory environment. Solvency II is a current issue and planning for that will require a lot of effort. There will be a lot of work to plan for the changes.