Benefits are designed to be competitive recruitment tools that effectively reduce absenteeism, disability and chronic illness.
The Current State of ‘Employer vs. Insurance RFP’s
Employers today often find themselves undertaking a Request for Proposal (RFP). RFPs are an important tool that allow for greater insight into the market. RFPs are used as a mechanism by employers to test the market competitiveness of their insurance programs and collect market intelligence regarding new offerings. The bidding process aids accountability and provides market information on emerging risk management techniques, regulatory changes and recent trends. However, RFPs are a time consuming and an arduous task that require inputs from multiple stakeholders, who often have competing priorities.
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. 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. Additionally, time and effort required by your team are also important factors to consider while evaluating the true cost of an RFP.
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 ever-changing business environment, waiting for an opportunity to bid the program to reevaluate its effectiveness and appropriateness for the organization can result in repairable loss. Businesses need to be able to constantly evolve and change to meet the needs of the market or risk losing its competitive edge.
Captives provide a clear line of sight to the working of the program, thereby 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 organizations insurance program.
A captive insurance company allows a company to gain true transparency and control of not only their loss exposure, but also the expense structure required to support their programs. This transparency promotes a sense of partnership between the employer and the insurance carrier. Employers with captives have often commented on the change in the relationship dynamic between the two entities, viewing the carrier as a partner than as a market option can have long term benefits.
Organizations that use captives are able to ascertain the need for a change or adjustment in rates without input from the market. Captives rid insurance transactions of opaqueness and thereby results in an open and honest conversations among all stakeholders – insurance carriers, brokers and internal organizational stakeholders.
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 sometimes not be in the broker’s best interest. This could potentially 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 broker/consultant/advisor. Allowing employers to derive more value from their service providers.
Many organizations may feel pressure compelled to bid frequently, to continually create competitive pressures and achieve better rates. This approach can create an abrasive relationship between the organization, the broker and the insurance carriers. Insurance carriers are looking for long term partners and often may choose to not bid aggressively in cases involving organizations who have a reputation of constantly looking to bid, as this can be disruptive for all parties involved.
Spring recently undertook an analysis for an organization whose incumbent broker initially quoted a 25% rate increase on the 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 the insurance carrier and decided to undertake an RFP – which resulted in an alternate carrier quoting a net decrease in premiums 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 insurance carriers and the broker.
The employer requested Spring undertake an independent review of the information presented to them by their broker and insurance carriers. Spring’s 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 potentially utilizing a captive to underwrite their employee benefit risks. This exercise could have been avoided if the employer was using a captive to insure its risks. 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 with a quick discussion with the insurance carrier. Which could 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 solutions should consider a captive. Captives provide the benefits of an RFP without disrupting a company’s day to day activities. It also helps bridge the gap of obscurity and trust between your company and your insurance carriers.
To see if a captive solution is right for your company, a captive feasibility study is the logical first step. 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. The study determines the most effective program design for the organization, including potential advantages or disadvantages of this alternate funding mechanism.