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BURLINGTON, Vt.-Funding corporate employee benefit risks through a captive may be an appealing option for employers, but significant obstacles still prevent that idea from becoming reality.
And, before many companies ever will be able to succeed in moving employee benefits into their captives, they must find ways to bridge the gaps between the property/casualty risk management and benefits sides of their organizations.
Michael Maglaras, president of Stamford, Conn.-based risk management consultant Michael Maglaras & Co., made reference to Samuel Beckett's play "Waiting for Godot" during a panel discussion on employee benefits in captives at the Vermont Captive Insurance Assn.'s annual conference earlier this month.
In the play, characters wait both in fear and eager anticipation of the title character's arrival, much as many in the captive community have waited to fund employee benefits through captives, suggested Mr. Maglaras, who moderated the panel.
"The question for us is 'Are we waiting for Godot?' Is Godot already here in employee benefits and captives and we don't know it, or is Godot never going to arrive?" he asked.
Funding benefit programs through captives clearly could greatly increase captives' premium volume. "My estimate is we would treble the amount of written premium in Vermont overnight, possibly quadruple it," Mr. Maglaras said.
To underscore the potential premiums involved, he cited a variety of statistics compiled by the U.S. Chamber of Commerce. Among them was that benefits, including items such as paid vacations, represented 42% of total U.S. payroll costs in 1996, up from 40.7% in 1994. The average cost of employee benefits per full-time employee was $14,659 (BI, Dec. 16).
The cost of medical insurance premiums had decreased to $2,486 in 1996 from $2,579 in 1995, and 96% of companies contributed to the cost of employee medical plans in 1996.
As a percentage of total benefits dollars spent, medical and medical-related benefits represent 25.1%.
"There's a great deal of opportunity in the medical area that really represents that same sort of risk day in, day out, that we've been insuring in captives since their creation," said Richard Hamilton, president and general manager of CSX Insurance Co., a Vermont-domiciled captive.
Still, there are significant obstacles to funding employee benefit programs through captives, chiefly opposition from the U.S. Department of Labor, which regulates group benefit programs. In 1993, CSX Corp., the parent of CSX Insurance Co., sought Labor Department permission to reinsure its group term life insurance program through its Vermont captive, but the department later rejected CSX's application because too much CSX-related business would have flowed through the captive.
Indeed, a 1979 Labor Department ruling sets tough restrictions on employers' ability to fund benefits through their captives. Among other things, the captive must be licensed in a domestic state, and no more than 50% of the captive's business can be generated by its parent. That latter restriction effectively rules out the use of most captives to fund employee benefits.
Another problem with moving employee benefits into captives may be that those involved in the captive operation typically come from a property/casualty focus and might not have a full understanding of how benefits systems work, Mr. Maglaras suggested.
Derick White, Vermont's assistant director of captive insurance, noted that when Vermont regulators meet with someone to discuss a captive employee benefit program, they're usually talking to a property/casualty person who then says he or she will have to go back to the employee benefits specialist to get more information.
The entire issue of the property/casualty risk manager becoming more involved in the benefits system is an issue in itself at many companies, raising the prospect of turf battles between the risk management and employee benefits operations.
Another potential stumbling block could be the different positions the risk manager and the top employee benefits manager often occupy in the hierarchy of organizations.
For example, as vp for human resources at the New Haven, Conn.-based Hospital of Saint Raphael, panelist Michael Dimenstein said he reports directly to his organization's CEO.
"Mike reports to a higher level in his organization than his counterpart (in risk management) would," Mr. Maglaras said. "Might that have something to do with it? These are things we need to be asking ourselves."
Meanwhile, people on the human resources side might be aware the company has a captive but beyond that know little about it.
To advance the possibility of placing employee benefits in captives, organizations must find "points of commonality" between old-fashioned risk management and human resources, Mr. Maglaras said.
Despite these obstacles, funding benefits through a captive shouldn't be ruled out. For example, CSX's Mr. Hamilton said he thinks the Department of Labor might be willing to grant approval to a captive benefit plan under the right circumstances, but he did not elaborate on those circumstances. In addition, employers do not need Labor Department permission to fund certain employee benefit programs, such as benefit plans for employees working outside the United States, through their captives.
Ultimately, Mr. Maglaras suggested, the property/casualty risk manager has "a lot of convincing" to do to the company's human resources people of the advantages to be gained by using the company's captive in its benefits program.
George Chaffee, president of Skandia International Risk Management (Vermont) Inc. in Burlington, coordinated the conference session.