Novel ways firms using to control employee insurance costs

Employees often rue about their limited benefits and how expat packages are shrinking after the Great Global Recession of 2008, but employers, being burdened by increasing cost, are looking for new ways to control their spiraling staff overhead costs.

One such instrument that has been gaining popularity to reduce the financial burden of employers is ‘captive insurance,’ an alternative to traditional insurance.

Earlier, captive insurance companies were formed to almost exclusively insure their owners’ property and casualty risks, but today’s captive insurance firms can provide virtually any type of coverage, as long as it is within the regulations of the country.

Captives are routinely used to insure such risks as contractors’ professional liability, environmental liability, employment practices liability, cyber-security, and warranty programmes.

With its increasing popularity, a number of organisations are utilising some form of captive insurance to fund the costs of employee benefits such as medical and life insurance, accidental death and dismemberment, long-term disability, and retiree benefits.

According to insurance firm Zurich, benefits that can be added to a captive include basic and supplemental life, long-term disability, medical, workers’ compensation, accidental death & dismemberment and business travel accident.

Recent research shows that the use of this instrument is gaining popularity the world over. A new report by Towers Watson, a human resource consultancy, reveals that over the past decade the number of captives that have implemented employee benefits worldwide has increased nearly 10-fold, from 9 in 2004 to 77 today.

The vast majority of companies choosing to implement such a financing vehicle have done so in order to save significant costs on their employee benefits bill, shows the research.

Towers Watson polled over half the employee benefit captives operating globally on their current use of captive vehicles and how they anticipate this will change in the next five years.

The main priority for two thirds (67 per cent) of the group that have implemented a captive vehicle is to save cost on employee benefits and other financial benefits.

A further 24 per cent claimed their impetus was to control and improve their claims data, which in turn would help proactively manage benefit costs, reads the report.

“With the growth in employee benefits and large increase in costs for many types of benefits, companies have been prompted to set up their own captive frameworks to help keep their costs down to sustainable levels,” said Lee Purcell, Towers Watson’s Global Health and Group Benefits practice leader for the Middle East.

“Sometimes, there will be no solution available from the external market, sometimes the costs from traditional insurers will be too high, but cost containment is always at the heart of any captive decision,” said Purcell.

The poll also highlights that nearly two thirds (62 per cent) of those questioned use their captive for death and disability benefits and medical insurance, while a handful (11 per cent) also include defined benefit retirement savings as well.

In the future, nearly half the captive users (48 per cent) are also considering a captive pension transaction, either in the next 3-5 years (36 per cent) or within the next 12 months (13 per cent).

“The breadth and depth of captive use continues to expand as more companies realise the potential to mitigate the ever spiraling costs of employee benefits. Companies with a desire to take on additional risk can reap the biggest benefits but careful assessment is vital before launching into any kind of self-insurance as only strong, well-managed captives succeed.

“While cost savings are a clear motivation behind setting up a captive in the first place, the success of individual captives varies significantly. While the median annual return for global employee benefit captives was just over 11 per cent on total plan premiums, there was a wide disparity in the profitability of individual captives with the most successful yielding 65 per cent returns while the lowest performing were left with a –77 per cent deficit,” said Lee Purcell.

Captives versus traditional Insurance

According to International Risk Management Institute, “in traditional insurance you may have applied for insurance by giving underwriting information to a party who enters into a contract with you to provide repayment of losses under certain circumstances. To go outside this structure is alternative risk finance, which can take many forms, one of which is a captive insurance company.

“With a captive, instead of just writing a check, you will see all the components of the premium play a part in its pricing and delivery. This is called unbundling.

“Another critical point is that alternative risk finance is not in opposition, or the enemy of, the traditional insurance company. For large losses, a large insurer is required. That is probably not the captive. For small losses, the traditional insurer often prefers that the insured handle those. This provides an opportunity for the insurer to shift costs to the insured through the device of a captive. These costs can also be shifted through deductibles, retentions, and coinsurance, but a captive can create the illusion of control for the insured, while eliminating nuisance costs for the insurer. This illusion can be a highly successful marketing tool for a traditional insurer.”

 

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