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Use of captives set to accelerate in shifting people risk landscape

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By Mark Cook , Paul Devitt and Francis Coleman | June 7, 2021

More companies are using captives beyond benefits (re)insurance features and focusing on their role in employee benefits programs.

More companies are using captives for employee benefits financing as they realize how the flexibility of the captive model enables them to expand their use of captives to cover a range of people risks, including those associated with wellbeing programs and diversity, equity and inclusion (DEI) initiatives as well as the financing of unfunded liabilities related to employee benefits. Today’s employers increasingly value what these programs offer when designing benefits in a volatile environment, so they are moving beyond benefits (re)insurance features and focusing on the captive’s role in a holistic people risk management strategy.

The evolving role of captives for employee benefits

Companies have been using captives to finance employee benefits for the past 30 years. In the early 1990s, captives were used initially for cash benefits and life, accident and disability insurance. Subsequently medical stop loss in the United States became an active market for captive involvement. At that time, companies looked to captives to help them contain costs through the capture of risk and profit margins and to control premiums. In the 2000s, financial risk management was top of mind as captives were expanded to manage more esoteric risks, including pension risk, termination indemnity, expat and non-U.S. medical benefit risk.

Today, companies are recognizing that if they own the benefit financing and risk exposures through the captive, they can also have increased influence over the design, utilization and pricing of the programs and what is offered. Consequently, we’re beginning to see captives support the company’s overall people strategy and extend beyond traditional employee benefits to the broader employee value proposition.

Capturing new opportunities

The flexibility and design control elements afforded by captives enable employers to offer new and expanded benefits, which are critical to building workforce resilience during and after the pandemic.

  1. 01

    Boosting wellbeing programs

    Given the toll the pandemic has taken on employee wellbeing, employers are looking to offer programs that support all wellbeing dimensions ─ physical, social, emotional and financial ─ and that can be tailored to different employee needs. For example, in some companies there may be a demand for programs that support the wellbeing of caregivers, including parents, or for telebehavioral health services to help employees suffering from stress and anxiety.

    Such benefits can be expensive, with costs not understood and coverage not always available in markets where it’s needed. The captive can help underwrite these programs, bridge short-term gaps in funding and help source local providers through existing fronting insurers. Moreover, the existing fronting network can help simplify the contracting challenges many multinationals face with any new vendor by leveraging the existing network reinsurance agreements.

  2. 02

    Providing new or enhanced program flexibility

    Similarly, captives can provide an insurance mechanism for voluntary benefits from pet insurance to childcare benefits to help meet the increased demand for choice and for programs that better support overall employee wellbeing.

    Recently, we have seen a substantial increase in the use of employee benefit captive models to eliminate COVID-19 exclusions in local coverage and paying COVID-19-related claims. Additionally, captives allow a company to analyze a wealth of information, helping understand current and future consumption trends and inform better management decisions, including how to address the needs of a global workforce. For instance, analytics can help a company decide to remove certain plan exclusions (e.g., for AIDS, terrorism, suicide), add transgender benefits and extend coverage terms for employees in specific circumstances such as for families under distress or employees terminated due to the pandemic.

  3. 03

    Supporting diversity, equity and inclusion (DEI)

    With an increasingly diverse workforce requiring greater personalization to meet their needs and preferences comes the need to deliver initiatives that drive better DEI across geographies. Yet in certain regions, companies may not be able to secure the inclusive and equitable benefit coverage they need. The versatility of captives and the control they provide over local plan design provides a mechanism for companies to overcome local barriers and gain a competitive advantage by rolling out critical DEI programs globally.

  4. 04

    Financing unfunded liabilities related to broader rewards

    Employers are beginning to show an interest in using captives to finance previously uninsured/unfunded liabilities related to rewards. For example, a company may have a restricted stock liability where the restricted stock units are a form of deferred compensation. As the company matures, these programs can grow and incur a significant balance sheet expense. Captives can be used to finance the liability and to price and manage the associated risk off the company balance sheet.

    Furthermore, a captive can provide a mechanism for better governance of employee benefit plans globally, which can help improve compliance and the implementation of a wider people strategy. Captives also allow benefit leaders to tap into their company’s own risk discipline, as has typically been done on the non-life side for many years and align with how their organization manages other business risks.

Are you ready to tap the power of captives?

As we recover and reset, we believe that more companies should be leveraging the power of a captive. The following key reasons will now be featured alongside the more traditional considerations in building the business case for captive financing of benefits:

  • Boosting wellbeing. Captives provide flexibility to underwrite, source and bridge any short-term funding gaps.
  • Providing new or enhanced programs. Using captives, companies have a greater ability to add new coverages, global standards or remove exclusions.
  • Driving DEI. Captives boost DEI by helping remove local country barriers in program design.
  • Financing uninsured/unfunded liabilities. Captives help companies better manage risk and move it off the balance sheet.
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