Monday, February 26, 2024

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The evolution of employee benefits in a captive

Bill Fitzpatrick is senior vice president at Granite Management Ltd and an experienced international employee benefits and captive professional. He previously led Deutsche Post DHL’s corporate employee benefits programme from 2006 to 2022 before joining Granite in January 2023.

Captive-backed international employee benefits programmes have come a long way since the mid-1990s. Granite Management’s Bill Fitzpatrick outlines that journey and what comes next.

During the mid-1990’s, a few select companies were looking to circumvent the traditional Employee Benefit pooling route, preferring a means long-established within the property & casualty insurance industry; the reinsurance of employee benefits into their captive.

The reasons were relatively straight forward; to eliminate the frictional costs that are associated with writing employee benefits cover through a locally insured or pooled arrangement, enhanced quarterly reporting of claims versus the current annualized option, and to diversify the risk within the captive.

Towards the later stages of the 1990s, two European companies were significantly motivated by the saving proposition captives presented and began reinsuring EB coverage into their respective programmes.

Initially, the insurance networks struggled with the concept of meeting risk transfer and the movement of funds requirements; being more willing to emphasize pooling as the best construct for the aggregation of multinational EB plans.

The networks quickly learned that captives can bring substantial business into their portfolio and as long as service levels remained commensurate with that of local market expectations, the business retention levels exceeded that of any other funding methodology (locally underwritten or pooling).

This scenario was attributable to the captive’s breakeven pricing approach being applied, eliminating the need to re-market plans in order to secure better terms at lower premium levels.

The expansion of companies and insurer networks envisaging the placement of EB captive business within their respective portfolios expanded quickly, as multinationals realised that such a mechanism allowed for the greatest flexibility in terms of pricing and plan design, combined with the ability to modify policy provisions to meet the unique strategic needs of the parent company.

With increased control over the underwriting process and an enhanced understanding of annual claims trends, multinationals began insisting the insurer networks expand the availability of data and analytics needed to price such programmes.

Networks were asked to provide more detailed information in the form of ICD10 (International Classification of Diseases) data for the purposes of normalizing data and defining the specific claims being incurred; leading to better prevention and mitigation strategies that could be applied to further manage long-term costs.

As the multinationals’ underwriting abilities became more refined and comprehensive, they then convinced consultants to provide medical trend rates by country, allowing for a greater degree of accuracy when pricing local plans.

Such changes allowed multinationals to launch unique and tailored prevention and mitigation strategies within country medical programmes.

Since that time, the global market has seen similar developments in the identification and management of disability claims with many insurers utilizing an early intervention process emphasizing a focus on musculoskeletal and mental health conditions; due to the subjective nature of such conditions.

Such a change was essential, as insurer claims data determined that individuals who remain out of work for six months or more have a far less chance of returning to gainful employment compared to those undergoing early intervention by vendors specialized in dealing with such conditions.

Insurers are now also questioning public agencies (Western Europe) that determine the level and seriousness of the conditions in question, no longer relying on the state’s determination as to the level of disability use to determine eligibility for state benefits.

Present and future

If we fast forward to 2023, many companies have now been utilizing a captive for employee benefits for 15 years or more and by doing so, have built a significant breadth of data allowing for the application of multi-year underwriting and actuarial analyses on the value that such a programme brings to the parent company.

Most companies will confirm a savings of 10-25% versus that of a locally insured plan; before factoring any potential savings from claim prevention and mitigation opportunities.

To provide a long-term perspective on the savings opportunities an EB captive brings to companies, note the following example:

If an EB captive reinsured €50m effective on Jan. 1, 2023, assuming an annual 10% medical trend rate and assuming a savings of 16% per year; a company would exhibit a total aggregated savings versus locally insured cover of €127.5m (assumes breakeven underwriting and spread of countries & multiple lines of cover e.g. life, accident, disability & medical) over a 10 year timeframe.

In the coming years, most companies are/will be challenged by EB premiums increasing at a significant pace. This is as a result of high medical inflation, an aging workforce and an increase in chronic diseases. As companies look to control such costs, their reliance will resort to already established measures:

  • Continued employer funding of increased premiums
  • Cost shift greater premium amounts to employees
  • Increased costs to employees via higher deductibles and/or coinsurance amounts
  • Reduced coverage through contract modifications
  • Leveraging hospitals and physicians pricing models
  • Greater focus on improving the health of employees and their dependents

In most cases, employers will need to apply the above options in varying degrees by country to secure greater control over employee benefit costs.

Based on the above, it is easy to understand why companies must target the lowest based premium and leverage the financing, plan design and prevention/mitigation opportunities to fully realise both the short and long-term opportunity costs.

With the global competition on talent in full swing, many companies are looking to capitalize on their “Diversity, Equity and Inclusion” strategies across all reaches of their respective organisations.

While DE&I overlaps multi-functional lines within HR, companies are realising the opportunities presented within captives by normalizing plan designs across both geographical and cultural boundaries; presenting a seamless array of coverages normally excluded or limited within a given country.

The overarching aim of an international programme is to ensure a consistent level of cover globally, allowing for the selection of cover a company feels that is best suited for their employee population, ultimately enriching the DE&I strategical outcomes.

In summary, considering the cost implications that company’s face with future EB premiums and the goal to attract and retain diverse topmost talent, those companies that strive to transcend the premium and claims management cost curve will demonstrate a significant strategical advantage over their peers and competitors.

Unfortunately, those companies that delay a proactive approach to the financing and management will face an increasing spiral of costs year on year.