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Funding benefits through captives offers money-saving alternative

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SCOTTSDALE, Ariz.—One of the world's largest employers has dramatically expanded the use of its captive insurance companies over the past decade to fund more employee benefit risks, saving millions of dollars.

Global delivery giant Deutsche Post World Net of Bonn, Germany, which has about 500,000 employees worldwide and revenues of more than $60 billion, now funnels more than $40 million of benefit risks through captives domiciled in Luxembourg and Bermuda, said Bill Fitzpatrick, Deutsche Post's vp-corporate risk benefits.

That's a sea change from 1996—the first year the company began to fund benefits through its captives—when captive benefit funding generated just $763,000 in premiums.

Speaking at the recent 16th annual World Captive Forum in Scottsdale, Ariz., Mr. Fitzpatrick said using the captives for employee benefit risks—which include group life insurance, short and long-term disability and medical coverages—typically results in considerable savings.

"Nine times out of 10, we are 25% less than the commercial market," Mr. Fitzpatrick said.

Still, commercial insurers play important roles in the captive benefits funding program, Mr. Fitzpatrick said. Units of American International Group Inc. and Generali Group issue policies, provide administrative and claims handling services, and evaluate bids by commercial insurers to determine whether it makes economic sense for benefits risks to be funded through the captives.

Indeed, it sometimes may be more cost-effective—such as when there is intense competition—to fund benefit risks through commercial insurers.

"We will let the business go" when appropriate, Mr. Fitzpatrick said, noting that commercial insurers occasionally will drastically underprice benefit coverages.

Aside from reducing costs, funding benefits through a captive has other advantages, Mr. Fitzpatrick said, including giving the company greater flexibility in deciding how to handle a claim than they would enjoy in the commercial market.

Mr. Fitzpatrick cited a situation in which an employee in South Africa threw acid in his wife's face after an argument escalated. Deutsche Post, through its captive, picked up the air travel costs to fly the woman to the United Kingdom for treatment.

Chances are, Mr. Fitzpatrick said, a local insurer would not have funded the transportation.

While its captives are available to fund benefit risks of Deutsche Post operating companies, the operating companies themselves decide on the type and level of benefits they will offer employees.

"The benefits are defined by (human resources). They give us information and then we price the product," he said. HR units, Mr. Fitzpatrick said, can sometimes balk at being told, "This is what you will provide."

The benefit risks of more than 100,000 Deutsche Post employees are funded through the captives, with the company looking to expand that number considerably within the next year or so.

For example, Deutsche Post next year may apply to the U.S. Department of Labor to fund benefit risks of U.S. employees through the captive program. Additionally, because Deutsche Post has grown so rapidly over the past few years through acquisitions, there will be more opportunities to expand the program to cover more employees of recently acquired companies, he said.

At the same time, Mr. Fitzpatrick said, there may be big opportunities to reduce the organization's health care costs through new disease prevention and corporate wellness programs, which the company now is examining.