Captives: leading a quiet revolution in international employee benefits
The recent Captive Review webinar entitled ‘Employee Benefits – adding value to your risk management strategy’ brought together experts from Generali Employee Benefits (GEB) and American multinational Cargill Incorporated, to discuss the benefits of adding employee benefits to a captive.
Although captives are well-known and utilised by companies worldwide to control insurance risks and costs, it’s fair to say that the practice of including employee benefits in such an arrangement is still in its relative infancy. Yet the advantages of doing so for companies with a risk management mindset are manifold, according to insurers and clients alike.
Originally designed in the early 1960s to help mitigate a company’s property and casualty risk, there are now over 7,000 captives in operation worldwide. In contrast, the inclusion of employee benefits is a more recent development – albeit over the last 20 years - with around 80 companies using such an arrangement. This represents a growth area, with captives earning an enviable reputation, not only for risk management but also for a whole host of other advantages that a globally coordinated, yet locally sourced, programme can bring.
Why use a captive arrangement?
For global companies looking to mitigate risk, reduce volatility, stabilise costs, improve business intelligence, gain central control over employee benefits - yet enhanced service at local country level - there might be no better all-singing, all-dancing solution than a captive.
Marc Reinhardt, Director Sales & Distribution, GEB, explains that when a company adds employee benefits into a captive they are essentially taking the traditional concept of multinational pooling one step further.
“A captive is a sophisticated risk transfer mechanism,” he says. “The company is effectively setting up its own insurance company to cover their risks. A fronting insurer - such as GEB – issues the insurance policy on behalf of the captive and basically acts as its third party administrator. The underlying contract has to be locally admitted (compliant) where employee benefits are included in the captive and there is a reinsurance element, allowing for the transfer of risk from the local entity to the captive. The arrangement may include an aggregate stop-loss facility to cap the amount of losses the client is responsible for in terms of the frequency and severity of claims.”
Put simply, captives allow companies to limit risk and retain what would have been the insurance companies’ underwriting margins. Unused premiums and income generated by the captive insurance company on this third party business are returned to the company, turning what used to be an expense into a profit-generating programme.
What types of benefits can be included in a captive?
Typical benefits include life, accident, disability, medical, business travel insurance and pensions.
“We’re seeing an increasing interest from clients in putting pensions into a captive arrangement,” says Damian Ross, Regional Manager UK, Ireland and Nordic countries, GEB. “Putting a wide variety of employee benefits in a captive lends stability to the programme. This is particularly advantageous when property and casualty business is in there too, in terms of risk diversification.”
What are the keys to success?
For a start, says Ross, it’s vital for the company to ensure buy-in from senior decision makers at a central, regional and local level and good communications are essential.
Success also depends on the choice of insurer / network partner and their capabilities in terms of:
- Solvency of the network used – locally and centrally.
- Ensuring that geographies match, in terms of the provider’s local insurer partners and the local subsidiaries of the client company.
- Reporting capabilities.
- IT capabilities.
- Reinsurance capabilities – what levels and from which countries can the company reinsure?
- Service elements.
What kind of reporting is available?
Captives allow for the aggregation of reinsurance data, which may be used by HR and Risk managers to help identify all costs, improve processes, and identify any problem areas so that solutions may be tailored accordingly.
For this reason, it’s important for global wellbeing programmes to be rolled out as part of overall employee benefits programmes, says Ross, ensuring fully integrated management information and solutions. He adds: “Via captive programmes GEB can now provide to clients detailed medical trend reports and other bespoke reporting. This information may be split to both company and policy level to help develop a more proactive risk management strategy.”
Case study– Cargill Incorporated
Operating in 70 countries and with more of its 150,000 employees outside of the US than inside the country, Cargill provides food, agriculture, financial and industrial products and services to the world.
Audrey Rudberg, President of Minnetonka Insurance Company (MIC) - Cargill Incorporated, explained that certain employee benefits were viewed more like other insurance risks that could be managed at on a corporate level.
“We have a centralised philosophy for risk funding,” says Rudberg. “Our integrated approach allows for good financial oversight and the ability to manage terms and conditions. We also have a culture of compliance and are cognisant of the rules, regulations and culture in other countries. The captive is used as a tool for consolidating the risks of separate country programs.
Cargill desired to move from a de-centralised to a centralised financing position. As part of this, they wanted to move select risk benefits from outside the U.S. U.S. benefits were not initially in-scope due to regulatory issues under U.S. law.
Cargill was no stranger to captives, having run one for over 50 years for its property and casualty business. “Although previously some of our employee benefits were run through it, they weren’t reintroduced until around 3 – 4 years ago,” explains Rudberg. “We took a strategy proposal to our leadership team , along with HR, to bring certain employee benefits into the captive.”
One of the most obvious reasons for this was cost but, as Rudberg explains, perhaps even more important was the business intelligence that a captive could provide.
“In particular, we wanted a picture of total compensation, with employee benefits being such a critical spend there.
“We wanted the captive to give a picture of all costs, not just profits and losses. For example, what does it cost to administer those benefits? What does the broker cost? What does compliance cost?
“We also wanted more central control over financing of the selected non-US benefits. The same purchase was happening many times in the same countries. We wanted to find out whether there were opportunities to integrate. We also wanted to look at how to enhance the service to Cargill at a local level.”
The captive partnered with the HR Total Rewards Center of Expertise / International Benefits departments. They reached out to regional HR managers to discuss the plans. They provided regional HR teams with information on what a captive is, why the new move, what they were trying to accomplish etc.
“We also published a company policy,” adds Rudberg. “This helped ensure everyone is on a similar page at a local level and encouraged participation in the program unless there were compelling local reasons to remain outside.
“Local Cargill still designs the local benefit program. We’re trying to help ensure they understand the overall strategy and total spend at a country level.”
Rudberg provides her top tips for ensuring the success of a captive programme:
- Ensure that HR and / or Finance and Risk work in partnership.
- Understand the benefits, policies and funding in place.
- Conduct a feasibility study. “This helped us with the internal discussions with the leadership team as we didn’t have a total understanding of the life side,” says Rudberg.
- Find a network partner that fits the company model and footprint.
- Communicate constantly!
- Be cognisant of data protection – for example, the latest changes to EU data protection requirements.
On the last point, Rudberg explains: “We’ve constructed a Chinese Wall. The benefits team and local Cargill have more of the participant detail and the local team and insurer comply with data privacy laws. The captive has the information at a summary level – never anything private or confidential. For example, in the medical reporting that we receive, the data is arranged in such a way that you can’t identify individual claimants.”