Reason #2: Make better decisions based on enterprisewide data.
With the captive comes access to big data warehousing and real-time financial data. This granular and timely data enables companies to analyze how their claims programs are working and make adjustments as needed during the same plan year. This data can be particularly important for decision-making related to prevention and wellbeing programs, and measuring the effectiveness of those programs.
Reason #3: Consistent governance.
When buying local coverages across multiple geographies, multinational companies often struggle to provide consistent governance — and consistent benefits to employees — across multiple countries and regions.
Financing benefits through a captive enables companies to have consistent, streamlined governance.
Reason #4: Diversify solvency requirements and stabilize captive balance sheet.
Adding employee benefits to an existing captive adds stability and diversification to the captive's balance sheet. Employee benefits programs have different solvency requirements from property and casualty programs.
Since the implementation of the European Solvency II Framework, which provides for capital credits for (re)insurance companies with diversified portfolios, we have seen captive owners showing an increasing interest in employee benefit programs. The European Solvency II Framework rules assume that life and non-life risks do not correlate, so, in effect, if both risks are assumed by one single reinsurance captive, the diversification of the captive's portfolio is increased. This diversification helps organizations meet Solvency II capital adequacy rules.
Reason #5: Eliminate insurer risk charges and reduce brokerage expenses.
The old way of financing benefits was for companies to buy a local program in each country they operated. Over time, multinational pooling networks emerged, but these too left ample room for variation in how programs were administered, pricing, capacity, broker commissions and regulatory issues in each market. Forming a new captive or adding employee benefits to an existing captive means organizations can now have much greater control over pricing, capacity and, most importantly, coverage. They can eliminate the local pricing differentials, reduce local broker commissions and standardize benefits for employees, regardless of where those employees are based. This makes it much easier for companies to move employees between countries as needed, without having to worry about their benefits plan changing.
Reason #6: Designing and financing emerging risks.
The flexibility and bespoke nature of captive-based employee benefit(s) programs can enable organizations to offer new and expanded benefits that are more people-centric and extend well beyond the traditional employee benefits risk profiles. We are currently working with our captive clients as part of their companywide people strategy in the following areas:
- Wellbeing programs (in conjunction with Gallagher Benefits Services)
- Financing unfunded liabilities linked to deferred compensation plans
- Developing diversity, equity and inclusion (DE&I) initiatives
- Expanding use to include a range of voluntary benefits to reflect the changing needs of an agile workforce (e.g., caregiver support, emergency funds)
Reason #7: Defined benefit pension financing.
Although most defined benefit pension plans are closed, significant challenges remain in management of legacy obligations. A number of innovative transactions involving captives are proving to be beneficial for sponsors and trustees.
Pension captive transactions fall into two categories:
- A corporate sponsor seeks to gain control over assets and harmonize governance through a buy-in arrangement. Investment assets and management functions are then transferred to a captive via an insurance contract routed through a fronting insurer.
- To reduce costs and maximize flexibility, a captive is used as a synthetic fronting mechanism to access reinsurance markets directly.
So, is it time to move from an international pooling arrangement to a captive arrangement for employee benefit risks? These seven reasons suggest that it's worth a closer look. Restructuring global employee benefits around a captive reinsurance vehicle can reduce the costs of financing your employee benefit programs globally, make better use of an existing captive and/or expand opportunities to innovate employee benefit plans. These reasons better equip companies to attract and retain the best people.