It should come as no surprise that the
conversation of should we include some form
of employee benefits coverage in our captive
is being raised with more and more frequency
around boardroom tables and during captive
meetings in general. As we all know, a primary
reason for formation of a captive is to reduce or
control an entity or entities cost of managing it
risks. Additional benefits of insuring employee
benefit coverages in a captive may include:
Risk Diversification – Employee benefit risks
will typically be statistically uncorrelated with
the other risks covered by the captive. As a
result, the year to year volatility of the entire
captive insurance entity may be lower.
Cash Flow Management – Typically premiums
are due well in advance which ties up money
that could be used in other areas. The
employer can set premium payment terms
that better reflect actual usage and provide
flexibility to the cash management process.
Greater Control – Employers often feel they
have little control when dealing with one size
fits all plan solutions that don’t meet their
individual needs. The employer can dictate
some of the terms when they are taking a
greater percentage of the risk in house.
Investment Return on Reserves – The
captive insurer gets to hold the claim reserves
for the coverages they issue as opposed to the
commercial insurance carrier. As a result, the
captive retains investment returns.
The first question we often hear is, but isn’t
all this regulated by the Department of Labor
(DOL) and isn’t the application and approval
process daunting, time consuming and
expensive? The short answer is it can be, but
it depends on what coverage we are trying
to take on within the captive. DOL approval
will be required for a captive transaction if
it is determined the coverage constitutes
a Prohibited Transaction as defined by the
Employee Retirement Income Security Act of
1974 (ERISA). To date there have been only
a small number of companies that have gone
through the tedious process to reinsure these
group benefit programs, primarily group term
life insurance and long-term disability through
their captives. In order to gain approval to
conduct this business in their captives, in
addition to a formal application process, there
are a number of requirements including but
not limited to, using a fronting carrier with
a minimum of an AM Best rating of A, all
participants must be notified, an independent
fiduciary will be required to assess the financial
viability of the proposed transaction and the
plan will be required to provide a nominal
increase in benefit value to the participants.
These programs, typically reserved for entities
with an appropriate number of employees,
are not for the faint of heart. Significant time,
money and planning is required to successfully
gain DOL approval but over time can be very
beneficial for those who want to take greater
control over these benefits cost and plan
design.
The area we see making the most headwinds
in the captive space are those employee
benefits that are not considered to be
prohibited by ERISA. Many employer groups
self-insure some of their employee benefits
that are offered to employees. An Employee
Benefits Research Institute survey suggests
that the percentage of covered workers
enrolled in self-insured plans is greater than
60 percent and that number increases to 85
percent in companies with greater than 1000
employees! This frequency of self-insurance
of employee benefit plans creates a large
opportunity for captive insurance companies
to participate in the management of this risk.
Employers sponsoring self-funded health
benefit plans may choose to insure some
portion of their health benefit risk through a
stop loss policy. Medical stop loss is typically
not considered an employee benefit program
under ERISA since the policy indemnifies the
employer and not the employee.
THESE PROGRAMS,
TYPICALLY RESERVED
FOR ENTITIES WITH AN
APPROPRIATE NUMBER
OF EMPLOYEES, ARE
NOT FOR THE FAINT
OF HEART.
CAPTIVE INSIGHT