Captives and employee
benefits: A status report
Changes in legislation could spur employer interest in using captives
to fund their benefits
By Michael J. Moody, MBA, ARM
Alternative risk transfer (ART) users in the property and casualty world have seen a significant uptick in activity over the past dozen years. This impressive growth has had many industry observers scratching their heads because it occurred during an extended soft insurance market.
The increased utilization in property and casualty captives stands in sharp contrast to what has been going on in the employee benefits area. One area where this is clearly illustrated is in the number of approvals issued by the Department of Labor (DOL), which is a necessary step in being able to use the captive to fund ERISA-governed employee benefits.
While there have been about two dozen DOL approvals of single-parent captives, for the most part these approvals continue to be front page news. As a result of the lack of DOL approvals, some believe that there has been very limited growth in the utilization of captives in the employee benefits area.
Things are not as they appear
Certainly the expectations were high in August 2000, when the DOL initially approved Columbia Energy to use their captive to fund several of their employee benefits programs. But other corporations soon found that the DOL approval process was a little more difficult than they first believed. However, several organizations ultimately went through the approval process and, after the third company, the DOL was required to implement an expedited approval process known as EXPRO or the Fast-Track. The expedited service requires a decision on the DOL's part within 78 days rather than the one-year plus that it had taken previously.
Again, there was much anticipation that a more rapid pace would be forthcoming. This was not the case, however.
The DOL approval process has proven to be difficult to tackle, even when prior approvals provide a road map to follow. And it is not just the DOL approval process that has proven to be more complicated than originally thought. Internal corporate relations, cooperation, and coordination are also sometimes more complex than first envisioned. Karin J. Landry, managing partner of Spring Consulting Group, LLC, says a key to getting these types of programs formed is that the internal stakeholders must work together to make the captive viable.
Landry indicates that while outwardly there may be few signs of activity, to think that nothing is going on in the area would be incorrect. She says there are many organizations studying this topic. And she notes that her organization currently has a number of filings that they are working on for a January 1 renewal date.
She says that as the general property and casualty insurance market begins to harden, more companies will turn to captives for their funding requirements. As a result, she observes, it is only natural that they will consider all cost savings opportunities as part of the captive feasibility study. "Employee benefits is certainly one of these opportunities," she says.
Additionally, she points out, "There is confusion around the Patient Protection and Affordable Care Act (PPACA) which is causing employers to begin investigating alternatives such as captives to control their own destiny." As the confusion intensifies, interest in and movement to captives should follow. Landry also notes that even those corporations that have obtained the DOL approval are beginning to consider including additional coverages in the captive. Traditionally, companies have started out using the captives to fund term life and AD&D coverages, but today, Landry says, they are investigating "such things as retiree medical, pensions, and annuities."
Finally, she notes that many international employers have been using multinational pooling arrangements to help control the cost of their international benefits. Some of these firms have now started to use their captives as a method of centralizing the benefit financing. She says, "They can use the captive to balance one country vs. another." She also says that while pooling is a good idea for the corporation as a whole, sometimes there can be some resistance from the local business units. In those cases, the "captives can add credibility to the transaction." At the end of the day, "It shows the international business units that it is a serious effort."
New prescription for medical coverage
For a variety of reasons, most corporations have not included consideration of their employee medical benefits programs in the captive. One of the major reasons is that most companies have already moved their medical programs to a self-funded arrangement and are already seeing cost savings from these arrangements. Thus, for the majority of employers, utilizing self-funding can provide significant savings and the approach does not require any DOL approval process.
However, Michael Clark, a consultant at Spring Consulting, says there still are ways to squeeze additional savings out of these self-funded programs. He indicates that a newer approach is to utilize the captive by including the medical stop-loss coverage in the captive. "Medical stop-loss or excess loss coverage is a layer of insurance protection for employers who choose to self-fund their health insurance programs," he says. He also notes that self-funding has been popular in the employee benefits area for years, since it "reduces some frictional costs while still maintaining control over the employee benefits programs."
Clark also points out that while large corporations have been utilizing self-funding, small employers have also been able to avail themselves of the advantages through group programs. Now, he points out, large groups and associations are "essentially taking the program design of being self-funded to the next step," and utilizing group captives to fund the stop-loss coverage for group programs.
Landry says there is "a lot of interest in using captives for medical stop-loss."
Initially, many associations were hoping that they could utilize a risk retention group to fund the group stop-loss program. While some state insurance departments did not have any trouble considering the stop-loss coverage as a liability-type coverage, which is required by the RRG legislation and thus regulated under the Risk Retention Act, several states voiced a concern about this. Actually, California had major problems with the idea and issued a cease and desist order to stop the use of an RRG that was providing stop-loss coverage for auto dealers. As a result, Landry says, many of the associations and groups are being forced to use either a group captive or a cell captive.
A potential game-changer
Clark points out that "Early in July 2011, the State of Maine passed PL 90, a new law that revises its captive insurance law." It had been only a year earlier that Maine had passed its original captive legislation.
According to Landry, the revision will allow associations to write medical coverage through a captive for the members in the state, as though the program were fully insured. In essence, the Maine reform allows businesses, whether in Maine or other states, to join together to create a "captive" health program. Many believe that authorizing a captive insurer for health benefits gives small businesses another cost-effective way to offer health coverage to their employees.
"In my opinion, this is happening," Clark says, "due to the fact that small businesses that join together through a captive or RRG are looking for innovative ways to be able to obtain coverage for their medical programs, given the risk and volatility of unlimited coverage provided under the new PPACA." He adds, "Small employers are unable to financially cover the costs and risks of these programs, so a captive could provide another approach for coverage."
This provision was driven by a group of employers and health providers who wanted to design their own value-based, wellness-focused employee health benefits program outside of the traditional health insurance arena. At this point, no other domestic domicile allows captives to offer individual health insurance. The precedent that this will set will have a significant impact on other domiciles, but to date, few others are aware of this industry-changing legislation. Landry believes it will not be long before the word is out about this approach and other captive domiciles will begin considering a similar move. This revision to the Maine captive law may well provide the basis for significant growth within the captive movement.
Despite the fact that captive utilization within the employee benefits world is not being reported on every day, Landry says there continues to be significant employer interest. Numbers of captives are reviewing the feasibility of establishing branches for their employee benefits. Additionally, they are considering moving beyond the traditional term life/AD&D coverages as well. She believes that as captive owners get more comfortable with their captives, they will naturally begin assuming additional types of coverage.
From a cost-saving standpoint, she says, "Most companies should end up with a win when they use a captive to fund their benefits." She also notes that while DOL approvals have been slow to materialize, "There is a lot happening outside the DOL area." And she says, "From our standpoint, the group stop-loss area should see considerable growth."
For brokers who are considering moving into the benefits arena, now may well be a good time to start contacting prospects regarding the opportunities that are available via a captive. And for those brokers who have moved into benefits, the captive option offers an excellent door opener for new clients.