By Mike Matthews

Talent is one of the most important challenges facing multinational employers in a post-COVID-19 world. In what has become a high-stakes competition for talent, there are seismic shifts related to what people are demanding of their employers, how they plan to work and even where they will put down new roots.

HR managers for multinational companies, take note: If you're not reconsidering, refreshing and reinventing your talent strategy, you will be left behind. One of the tools increasingly being employed by global HR managers — to find better ways to achieve the required efficiencies, amplify flexibility and become an employer of choice — is to use your own captive (re)insurance company to finance a range of both traditional and emerging employee benefits.

Financing property and casualty risks through single-parent captives has been common for multinationals for many years. But a growing number of multinational organizations and their boards are now closely examining the total cost of financing global employee benefit programs. This heightened attention has led to new synergies between HR and risk management, and a growing number of HR managers are asking "How can a captive solution solve our employee benefit challenges?"

Captives are particularly effective for employee benefits programs because losses tend to be high frequency and low severity, which are less volatile than property and casualty losses, and therefore easier to forecast. Though full risk transfer of employee benefits achieves budgetary certainty at a local level, it tends to be far less efficient at a group level for large multinationals. By involving a captive in multinational benefit financing arrangements, it's possible to get the benefits of retaining risk and premium at a group level while maintaining a robust local administrative structure through one or more global insurance network partners.

Here are seven reasons why captives can be a game changer for funding employee benefits risks:

Reason #1: Attract and retain talent.

Attracting and retaining employees is more complicated than ever in the wake of a global pandemic and the recent workforce exodus. If companies want to attract top talent and be an employer of choice, they need to have comprehensive and affordable health and wellbeing benefits.

Benefits aimed at prevention and wellness have gained momentum, yet the benefits that employees most value differ substantially. By financing employee benefits through a captive, companies can design custom benefits that align with what their employees want most. Maybe that's IVF treatment for infertility; gender reassignment surgery; or diversity, equity and inclusion initiatives. Moreover, they have complete flexibility in terms of not just what they offer in their employee benefits plans, but also the wording of what they include or exclude. In short, the company can create a bespoke policy to insure claims from the risks it chooses and to fund some or all of these through the captive.

What is a captive?

A captive is a bona fide insurance or (re)insurance company owned by a non-insurance company parent which primarily insures or reinsures the risks of its parent and/or affiliated companies, usually formed in a specialized regulatory environment. A captive (re)insurance employee benefit program can provide a host of cost, control and coverage benefits that are specific to the needs of its parent organization and those of its employees.

Employee benefits checklist: Making your organization fit for financing through a captive.
  • Do we have a minimum of 5,000 lives insured globally, across at least two countries?
  • Do we have an annual employee benefit premium spend of more than $2 million USD (or local currency equivalent)?
  • Do we have full knowledge of the organization's risks and good visibility of its portfolio?
  • Do we have brokers who focus on compliance and benefits design?
  • Do we have effective internal communications, collaboration and governance?
  • Do we already use a captive within our organization for other risks, such as property and casualty?

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.

Author Information

Michael Matthews
Michael Matthews
Commercial Director, Artex International