Employers today often find themselves undertaking a Request for Proposal (RFP). RFPs are an important tool that allow for greater insight into the market, and are used as a mechanism for employers to test the competitiveness of their insurance programs and collect intelligence regarding new offerings.
Pros: The bidding process aids accountability and provides information on emerging risk management techniques, regulatory changes and recent trends. A bidding exercise is often seen as an opportunity to hit reset on an existing plan and evaluate if the program continues to meet the everchanging needs of an organization. In a dynamic and evolving business environment, waiting for an opportunity to bid the program to reevaluate its effectiveness for the organization can result in irreparable loss. Businesses need to be able to constantly change to meet the needs of the market or they risk losing their competitive edge.
Cons: RFPs are a time-consuming and an arduous task that require input from multiple stakeholders, who often have competing priorities. An RFP can also be an expensive exercise, both in terms of tangible and intangible resources. In monetary terms, there are the fees for advisors/brokers/consultants. Your team will also need to devote time and effort, another factor to consider while evaluating the true cost of an RFP
An integral part of most insurance arrangements is the broker. Broker arrangements can, at times, create a degree of obscurity. Since brokers are usually commissions-based, decreasing premiums or making changes may not necessarily be in the broker’s best interest. This has the potential to add another degree of complication and difficulty to the decision-making process. In a captive setting commissions paid to brokers are clearly visible. This clarity of fees generally leads to a clearly defined scope of work for the third party (broker/consultant/advisor), eliciting more value for employers from their service providers.
Many organizations feel the pressure to bid frequently, to continually create competitive pressures and achieve better rates. Some are even required by corporate policy to bid every few years. This approach can create an abrasive relationship between the organization, the broker and the insurance carriers. Carriers are looking for long-term partners and may choose to not bid aggressively in cases where the organization in question has a reputation of constantly looking to bid — a fact that is disruptive for all parties involved.
Alternative: Captive insurance companies provide an alternate solution for employers who are looking to escape the rut of undertaking an RFP every few years. Captives provide greater transparency and control to employers over their insurance programs and eliminate the often costly and time-consuming need to bid programs to ensure competitiveness. Captives allow organizations to have a clear understanding of their experience and thereby eliminate the arbitrariness of rate hikes by the incumbent carriers.
Captives provide a clear line of sight to the working of the program, allowing for customization in an almost real-time basis. A captive framework leads to additional reports and information which further facilitate tweaks and adjustments that benefit an organization’s insurance program.
A captive insurance company allows acompany organization to gain true transparency and control of not only its loss exposure, but also of the expense structure required to support its programs. This transparency promotes a sense of partnership between the employer and the insurance carrier; viewing the carrier as a partner rather than as a market option can have long-term benefits.
Organizations that use captives can ascertain the need for adjustment in rates without input from the market. Captives rid insurance transactions of opaqueness, resulting in an open and honest conversations among all stakeholders – insurance carriers, brokers and internal organizational stakeholders.
A global technology organization recently received a 25% rate increase on their employee benefit program. When threatened with the possibility of an RFP, the incumbent carrier revised their quote to reflect a 10% increase in premium. The organization was disillusioned with their carrier and decided to move forward with an RFP, resulting in an alternate carrier quoting a net decrease in premium
s of about 15%, along with a multi-year rate guarantee.
While a 15% rate reduction is a seemingly positive result, the process and effort required to get there was expensive, time-consuming and left the HR team feeling beholden to the wishes of the broker and insurance carriers. The employer requested for an independent review of the information presented to them by their broker and insurers. This analysis revealed that the organization had a much better loss experience than indicated in the rates provided.
The organization is currently considering its options for the upcoming year, including the potential utilization of a captive to underwrite their employee benefit risks, since the exercise above could have been avoided if the employer had been using a captive all along. At the time of the initial rate increase (of 10%) the employer, along with their broker, would have been able to quickly ascertain that the rate hike was unnecessary and could have been addressed swiftly with the insurance carrier. This would have saved the organization valuable time, effort and cost of disruption.
To conclude, companies that are financially sound and have a reasonably predictable insurance risk are ideal candidates to evaluate the possibility of using a captive. If you are an employer looking for a long-term solution for your insurance and benefits costs, you should consider a captive. Captives provide the benefits of an RFP without interrupting a company’s day-to-day activities. They also help bridge the gap of obscurity and trust between your company and your insurance carriers.
A captive feasibility study is the logical first step in determining if a captive is right for your company. The study identifies the organization’s goals and objectives, reviews the current state of programs, analyzes the data, and then estimates potential captive savings for each line of coverage. As a result, you are left with the most effective program design for the organization and potential advantages and disadvantages of this alternate funding mechanism.