Employee Benefits and Captive Insurance Companies Benefits.pdfGlobal Pooling and Captives •...

TCIATennessee Captive Insurance Association, Inc.

EmployeeBenefitsandCaptiveInsurance

CompaniesAndrewClayton,ParetoCaptiveServices

JamesO’Dell,WillisofTennesseeKathleenWaslov,Willis GlobalCaptivePractice


Agenda

• IntroductiontoEmployeeBenefitRiskExposures• CaptiveSolutionsforUSMedicalPlans• CaptiveFinancingofUSERISAPlans• PoolingGlobalBenefits• FutureOutlookandChallenges

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EmployeeBenefitRiskExposures1.LargeGlobal Plan Lives Exposure Premium SpendperEE

US Medical25,000 Accident

MorbidityMortality

$250million $10,000

US Life,LTD $12.5million $500

14CountryPool Life,MedicalDisability

4,000 $1.5million $375

RestofWorld(est.) 23,000 $8.5million $375

Global Retirement Longevity

2.Mid-Market US Plan Lives Exposure Premium SpendperEE

US Medical200

AccidentMorbidityMortality

$1,000,000 $5,000

US Life,LTD $60,000 $300

US Retirement Longevity

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USEmployeeBenefitCosts

PrivateEmployerCosts % $/hour PerEE

Wages& Salaries 69.4% $21.82

MandatedBenefits(WC,SS,Medicare,Unemployment 8.0% $2.51

FringeBenefits

Healthcare 7.7% $2.42 $4,834

PaidLeave 6.9% $2.17 $4,332

SupplementalPay 3.5% $1.10 $2,197

Life&DisabilityInsurance 0.5% $0.16 $314

Retirement 4.0% $1.26 $2,511

TOTAL 100% $31.42

EXAMPLE:200 employees = $12 mm payroll w/$1mm medical benefit payments

Healthcare,$2.42

PaidLeave,$2.17

SupplementalPay, $1.10

Life&DisabilityInsurance,$0.16

Retirement,$1.26

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FinancingEmployeeBenefitRiskRisk

Deductible orSelf Insured

Retention

Insurer Excess

FullyInsured

Approach

By buying insurance for 100% of the risk, the carrier receives the full premium, but takes on the risks and potential rewards of the insured’s loss experience.

Instead of paying insurer profits and expense loads on the most predictable losses, the insured takes responsibility for deductibles or Self-Insured Retentions.

Captive Layer

Deductible orSelf Insured

Retention

Insured Excess

Deductibles or Self Insured Retentions may still be utilized, but the captive accepts risk up to moderate levels of volatility and transfers large losses to the excess carriers.

DeductibleorSelfInsuredRetention

The insured may prefer to enhance control over the claims management and bear more risk, subject to enterprise’s risk appetite.

Insurer Excess

1. Single-parent captive with other risk types

2. Cell captive with or without other employers

3. Group captive with shared ownership

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Stop Loss Group Captive

• akaHealthInsuranceGroupCaptive• Provideemployeraccesstoselfinsurancewithoutthetraditionalriskandvolatility

• Transparency• Grouppurchasingdynamic• ControloverUnderwriting• Betterexperiencerating

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TypicalCaptiveMemberCharacteristics

• “Medium”sizedemployers– 50to400enrolledee’s• 80%comefromFullyInsuredprograms• 20%comefromSelfInsuredprograms(thisisnewtrend)• Privatelyheld• Entrepreneurial• Havehad“dammit”moment• Wanttocontrolhealthcarecosts• Unwillingtorelyon“system”

CONFIDENTIAL7


FullyInsuredChallenges

• Extra3-6%oftaxescomparedtoSelfInsured• Noreal/actionabledata• Reducingclaimsbenefitscarrierprimarily• Limitedcontroloverplandesign• Onlylooksgoodwhenviewingforoneyear• Doesnotlimit long-termrisk

CONFIDENTIAL8


SelfInsurance isGreatbutBumpy

• ImprovesmanyoftheFullyInsuredflaws• Laserscanaddsignificantincreasedcosts/volatility• Stoplosspremiumscanincreasesignificantlyinanygivenyear• SpecificLimitlevelsunderconstantupwardpressure• “NoLaser”policyonlyhelpsforayear

CONFIDENTIAL9


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Group Captive Structure - Administration

• EachmemberhastheirownTPA,plan,andstoplosspolicy• Members’termsarebasedontheirexperience• Groupdecisionsrelatedto:

• Renewal/ServiceProviders• Wellness• PlanDesigns&Options

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Group Captive Structure – Risk Structure

• Eachmemberhastheirown“small”selfinsuredlayer• Memberssharemezzanineclaimsthroughthecaptive• Thecaptivebuyscatastrophicinsurance(“stoploss”)forthe

unpredictableclaims

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Group Captive Structure

Risk Transfer

Group Captive

A B C D E F G H I J

Individual Self Insured Retention (SIR)Layer

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GroupCaptiveStructure

Group captive provides the mechanism that reduces the year-to-yearvolatility and risk of being self-insured.

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Basic Group Captive Structure

• Avoid• MEWA(Multi-EmployerWelfareAssociation)• AssociationHealthPlan

• Variation• CaptiveParticipant(s)• StopLoss&ReinsuranceLimits• Insured– employer,trust,affiliate• FrontingCarrierandReinsurance

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Employer Motivations

• EBMarket• Frustration

• Transparency&CostofClaims• Renewal&Credibility• Costshifting

• Education• Cashflowofclaims• Outcomebasedwellness

• ReactivevsProactive15


EmployerObjections

• Statusquo/inertia• Too“risky”• Toonew• Morework• Employeebenefitsaretaboo

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CaptiveFinancingofUSERISAPlans

• ERISA-regulatedPlans• Medical,Pharmacy,Dental,andVision• LifeInsurance/DeathinService• Long-termandShort-TermDisability• Timeoff,Vacation,andSickLeave• Defined-BenefitandDefined-ContributionPensionPlans• RetireeMedical

• Non-ERISAPlans• Mostsupplementalexecutiveretirementplans• Otherplansofferedtoselectgroupsofemployees,suchasexpatriates• Individualvoluntaryinsurance,ifnotinfluencedbytheemployer• Employer-paidstop-lossinsuranceusedtofinancemedicalplansisnotgovernedbyERISA(seeDOLAdvisoryOpinion92-02A)

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ERISAPTE’s

• CaptiveinsuranceofERISAplansisprohibitedandrequiresaprohibitedtransactionexemption(PTE)fromtheUSDepartmentofLabor(DOL)if:

• Thecaptiveisa“partyininterest”ormajority-ownedbytheplansponsor;and• Theinsurancetransactioninvolves“planassets,”i.e.,contributionsbyemployeesoremployerstofund thebenefitplans

• TheDOLwillgrantaPTEifproperapplicationismadeandcertainconditionsaresatisfied

• Thereare3typesofPTEs:• Statutory:forinsurancecompanies• Class:forcaptiveswith50%ormoreunrelatedbusiness• Individual:forallothercases

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IndividualPTE’s

• TheDOLhasbroaddiscretionindeterminingwhetherornottograntexemptions.ApprovalisgrantediftheDOLdeterminesthattheexemptionmeetsERISAstatutorycriteria.Itmustbe:

• Administrativelyfeasible;• Inthe interestsoftheplan,itsparticipants,anditsbeneficiaries;and• Protectiveoftherightsoftheplan'sparticipantsandbeneficiaries.

• Thereare2pathstoobtaininganindividualPTE:• EXPRO:anexpeditedprocessthattakes75-90days,allowableiftheapplicationissubstantiallysimilartothosealreadyapprovedbytheDOL

• Customized,basedonindividualfactsandcircumstances,forcasesthathavedifferentcharacteristics

• SeeDOLlink://www.dol.gov/ebsa/Regs/PTE_procedures.html

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EXPRO

Earlypioneers,ColombiaEnergyandADM,proposedasetofconditionsfortheircaptivereinsuranceexemptionsthathavebecomethe“substantiallysimilar”standardforEXPROapprovals:

• UScaptivelicense• Auditedfinancial statements• Useofafrontingcompany• Anindependent fiduciarywhocertifies thatthetransaction isinthebestinterests ofemployees

• Abenefit improvement fortheplan• Typicalcosthasbeenlessthana1%increase• However,thehurdleforimprovementshasincreasedsincethefirstPTEswereissuedin2000-2007

| 2020


GlobalPoolingandCaptives

• Multinationals haveusedEBriskpoolingsolutions for50years,andusagehasbecomeevenmorevaluabletoemployersnow,giventhese trends:

• Rapidgrowthinthecostandriskofofferingemployeebenefits• Employeedemandforprivately-fundedbenefits ingrowtheconomies• Needfordatatodescribewhatbenefitsareofferedlocally,howmuchtheycost,andwhattypesofriskstheypose

• Centralizationofoperationsandgovernanceto informplandesigndecisionsandreinincosts

• The interest incaptivereinsuranceofpoolsderivesfrom:• Betteraccesstoriskexposureandclaimsdataforself-managementofEBliabilities• Opportunity toblendpredictableEBriskswithnon-liferisks• PotentialtoreduceSolvencyIIcapitalrequirementswithdiversifiedriskportfolio• Accesstoreinsurancemarketproducts forexcessprotectiononablendedbasis

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PrevalenceandUsage2014UsageStatistics*

Network #EB PoolsinOperation #EB CaptivesFronted

Allianz 100 11

Generali 459 28

IGP 825 8

ING/AIG 143 0

Insurope 647 0

Maxis 182 21

Swiss Life 435 1

Zurich 100 10

TOTAL 2,891 79

• Most EBpools include these benefit risk exposures:• Mortality (death benefits tosurvivors)• Disability (income replacement)• Accident (lump-sum benefits)• Sickness (primary orsupplementary medical and

drug payments)• Somepools include risk-related elements of

retirement plans, such assurvivor annuity benefits• USbenefits arerarelyincluded

• Federal regulations prohibit profit-taking byemployers

• Somepools include medical stop loss whichreimburses employer payments

* As reported by the Networks

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PoolsTransferRiskAndDriveResults• Poolsaggregateemployeebenefitliabilitiesandreducetheper-unitcostofbenefitriskandrelatedinsuranceservices.

• Poolingisdesignedforglobalcompanieswhowanttotakeaproactiveapproachtoemployeebenefitfinancingandhavethevolumeandscaletodrivelowercostsfortheiroperatingentities.

CorporateParent

Operating Entities Operating Entities

NetworkPool1

NetworkPartners

NetworkPartners

NetworkPool2

n Corporate Parent - sets global terms and conditions with one or more pooling networks.

n Operating Entities - purchase local policies and transfer risk to pooling Network Partners.

n Networks - reinsure the premiums and risks, combine underwriting experience in the pools, and pay underwriting dividends to the Corporate Parent.

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ValueofPooling• InformationandControl

• Betterunderstandingofriskexposuresandclaimtrends• Transparentpricing:claims+expenses+taxes+risk

charges• Coordinated,efficientcommunicationviacentral

relationships• ServiceLevelAgreementstoenforcequality

performance• CostSavings

• Reducedadministrativeexpensesandriskchargesby200to500basispoints

• Opportunitytorecoverunderwritingmarginsof5%to10%

• LocalBenefits• Secure,highly-ratedlocalinsurers• Norequiredchangestobenefitplandesigns• Higherunderwritinglimitswithoutmedicalevidence RiskMarginExpensesClaims

Longterm,centralisedfocuscanreduceclaims

Increasedriskretentioncan recoverinsurermargins

Volumefrompoolingcandecreaseper-unitexpenses

Independentpurchasing Pooling Captive

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X/SX/S

SampleCaptiveProgramStructureCaptiveinsuranceprogramwithmulti-linereinsurance,cross-classaggregateprotection,reinsurancemarketparticipation

DeductiblesProperty

Life EBLiability

DeductiblesDeductiblesDeductiblesDeductibles

Property

PrimaryPrimaryPrimary

X/S

X/S

X/S

X/S

CAPTIVE CAPTIVE CAPTIVE

X/S

* Multi-line / Multi-year Insurance Program• 1 - 3 years• Blended captive retrocession protection for Property

quota share, Liability, Financial or Special Lines, and Life EB

X/S ZURICH ML / MY *

CAPTIVE

Multi Line / Multi-year *

Cross Class Aggregate

Stop Loss **

Reinsurance Market Capacity

** Cross Class Aggregate Stop Loss• Additional captive protection• For Non-life (P&C) and Life Employee

Benefits

Financial or Special Lines (Cyber, EIL,

etc.)

X/S

25 Diagram fromZurich,July2015


EmergingTrendsandIssues

• Competition amongthe8poolingnetworks• Moreglobaldataavailable,especially medical claims• Bettersystems andreporting• Riskanalyticstomeasure exposure,spottrends,andoptimizeriskretentionandrisktransfer

• Focusonminimizing premiumratherthanmaximizing dividends• UseofCaptives

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Practice&Value

Wheredoesonestart?• Clearlydependsontheclient,butalwayswiththeHRteam!

• HRteamsaretheownersoftheEBrisks• RiskManagersaretheexpertsforinsurancesolutions• AppropriationoftheHRlanguage,regulations…iskeyfortheRiskManager• Appropriationoftheriskoptimizationsolutions…iskeyfortheHRManager

• ValuetobothHRandRM• Managingdataandriskstopreventandlessenlosses• LocalHRadvantagesincludeincreasedflexibilitywithregardstounderwriting,e.g.nuclear,chemical&biologicaleventscoverage,highrisksports,ex-gratiapayments

• RMadvantagesincluderisk-capitaloptimizationbyreductionincapitalrequirementviariskdiversification

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