Improved Claims Data Drives Use of ‘Captive’ Insurance

Stephen Miller, CEBS By Stephen Miller, CEBS August 8, 2016
Improved Claims Data Drives Use of ‘Captive’ Insurance

To take self-insurance to the next level, large corporations are using their own "captive" insurance companies to provide employee benefits. 

"In its simplest form, a captive is a wholly owned subsidiary created to provide insurance to its noninsurance parent company (or companies)," the National Association of Insurance Commissioners (NAIC), a U.S. standard-setting organization for state insurance regulators, explains on its website. There are estimated to be more than 5,000 captives worldwide, NAIC reports.

Findings released on Aug. 3 from an annual study by consultancy Willis Towers Watson show that the primary driver for nearly half (44 percent) of companies that provide employee benefits through captive arrangements is to control and improve their claims data, leading to better cost management. This is up from a quarter (24 percent) that named this as the primary motivator in last year's study.

Captives are increasingly being used to provide a range of health and welfare plans for employees, including life, accident, disability, medical, and insured elements of some retirement plans (such as spouse or orphan benefits). This form of risk management gives corporations more opportunities to protect themselves financially while exercising greater control over how their workers are insured worldwide.

"There has been a clear evolution in the rationale for companies to include employee benefits in their captives," and the effort to control costs is a key factor, said Mark Cook, a London-based director at Willis Towers Watson.

The consultancy's 2016 Global Medical Trends report, released in April, shows that the average global health insurance premium increased 7.5 percent in 2014, 8 percent in 2015 and is estimated to grow by over 9 percent this year, Cook pointed out. Captive users are responding, he noted: "Over three-quarters of those we questioned had noticed a trend toward increasing medical insurance claims among their employees. So the savings available to companies that run a successful benefit captive can be significant."

Greater Diversification

More companies are also looking to employee benefits as a source of diversification to more traditional lines of insurance handled by captives, such as property, casualty or business-related risks, Cook said.

Willis Towers Watson polled employee benefit captives operating globally that participated in its Captive User Group forum, held in London and New York City in May and June. The study found that half of those questioned use their captive vehicle to provide death and disability benefits as well as health care or medical benefits.

Proactive risk management was also reflected in the influence employee benefit captives have over pricing, with half indicating that their captive has full determination or significant influence over pricing rather than relying purely on local insurers' underwriting.

Looking ahead, nearly half of the employee benefit captive users (47 percent) indicated that they are also considering a captive pension transaction, either in the next three to five years (41 percent) or within the next 12 months (6 percent).

"Companies continue to explore further areas in which they can take on more of the risk and manage it internally in order to save money and mitigate [that] risk," said Cook. "Also, many companies now recognize captives' importance as a tool in benefit cost management by identifying and addressing the key cost drivers. Successful employee benefit captives can stabilize and slow down benefit cost increases in an environment where medical costs continue to increase."

Related SHRM Articles:

Control Your Company's Health Care Costs with a Self-Funded 'Captive' Program, SHRM Online Benefits, January 2018

Global Benefit Programs Strike Common Themes with Regional Variations, SHRM Online Benefits, August 2016

Small and Midsize Firms Choose to Self-Insure, SHRM Online Benefits, August 2016


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