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'Huge potential' for funding employee benefits risks through captives

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BOCA RATON, Fla. — Only a sliver of the world's roughly 7,000 captive insurers fund their parents' employee benefit risks, but that number is likely to grow significantly as more employers become aware of the advantages.

“There is a huge potential for growth,” said Lorraine Stack, a senior vice president with Marsh Captive Solutions in Dublin.

Ms. Stack and other panelists who spoke Monday at a session at the 25th annual World Captive Forum in Boca Raton, Florida, detailed the most compelling advantage of the approach: cost savings.

For certain lines of coverage, such as group-term life insurance and long-term disability, the cost savings — compared with buying the coverages in the traditional market — range from 15% to 25%, panelists said.

“The captive earns the underwriting profit and investment income earned” on premiums paid to the captive, said Kathleen Waslov, a senior vice president with Willis Towers Watson P.L.C. in Boston.

Another advantage to the approach — compared with buying coverage in the commercial market — is that the captive sponsor has greater control over the design of the benefits offered to employees, Ms. Waslov said.

Still, shifting employee benefit programs to a corporate captive is not an approach that employers can implement overnight.

The funding of certain benefit risks, including disability benefits, life insurance and health insurance, requires approval from the U.S. Department of Labor.

If the captive sponsor can qualify for a regulatory review approach known as ExPro, the entire review and approval process can be completed in well under three months, captive experts say. To qualify for ExPro, though, an applicant has to cite two substantially similar individual exemptions approved in the past 10 years, or one similar exemption and one approved through ExPro within the past five years.

Without ExPro, the review process can be two or three times longer.

“You need to seek Labor Department approval. And that can be a fairly lengthy process,” said Debbie Liebeskind, a senior Willis Towers Watson actuarial consultant in Parsippany, New Jersey.

In addition, Labor Department requirements — enhancing participants' benefits and using a commercial insurer to issue policies — that have to be met to win regulatory approval of captive benefits funding proposals are costs that need to be considered by employers thinking about using the approach, panelists noted.

Another factor employers need to consider before moving ahead is the ability of corporate risk and employee benefits departments to work together.

Shifting funding of corporate benefit programs to captives “takes a lot longer if the parties don't have strong relationships,” Ms. Liebeskind said.

But even in situations when an employer decides, after review, not to shift funding of benefit plans through their captives, cost savings still are possible.

Ms. Waslov cited a situation where an employer's long-term disability insurer lowered its rates after the employer told the insurer of its plan to fund the coverages through its captive.

Employer consideration of the captive benefits funding approach enabled the company to gain more leverage with the insurer, Ms. Waslov said.