Tackling employee benefits and third party risks

As seen in Captive International

COVID-19 impacted insurance coverages and industries differently, but a picture is emerging of what the employee benefits landscape will look like post-pandemic, says Prabal Lakhanpal of Spring Consulting.

As the dust begins to settle on the COVID-19 pandemic, forward-thinking organizations are focused on programs that provide competitive benefits as they look to lure new workers and retain existing employees. They recognize that employee benefits give them flexibility to deal with the changing employee landscape, from a demographic and geographic perspective, as well as improving employee wellness, maximizing their savings and increasing employee engagement in the modern era.

A holistic approach

Historically, employers were largely focused on ensuring they had adequate insurance coverage on a line-by-line basis, and these coverages often operated in silos. Today, more organizations are breaking down those silos and developing a view that is holistic, looking across the board to create an employee benefits program that emphasizes employee wellbeing and population health management.

Employee wellness is primarily the idea of not just providing employees with appropriate health, life and disability benefits, but also ensuring that employees have assistance regarding their overall wellbeing, including physical, financial, behavioral, social and intellectual health. Organizations increasingly understand how the individual components of their benefits programs are inter-related, and that evaluating and managing these relationships adds value to their employees.

A captive is an effective mechanism for achieving an integrated program. In an integrated captive program it is easy to bring together all the lines and ensure that the appropriate resources are being used to plug any gaps in the benefits portfolio. Most of our clients using this approach have been able to leverage the savings from the captive program to provide the additional coverages at almost no or nominal cost.

In addition, the transparency and clear line of sight into claims activity and utilization rates help employers plan for program changes, make decisions and adjust to changing employee needs sooner than they would be able to without a captive. Organizations that already had benefits in their captive when COVID-19 hit fared much better than those without one, as they were able to adapt quickly to make changes to their benefits that accounted for the unusual circumstances.

For example, we helped a large global employer leverage its captive to provide extended benefits for employees it was forced to furlough when the pandemic struck. Its carrier would allow for continued benefits for only three to six months, but by using the captive to take on the risk, the organization was able to keep benefits for furloughed employees for 12 months at no additional cost. This move went a long way to improve employee retention and morale.
Medical stop-loss

If we think about the range of employee benefits in the US, medical stop-loss is perhaps the one that has changed the most and attracted the most interest in the last few years. It is typically not an Employee Retirement Income Security Act (ERISA) benefit so Department of Labor (DOL) processes don’t apply.

There are two driving forces behind this interest. First, healthcare costs continue to skyrocket, causing employers to look at alternative ways to bend the healthcare cost. Medical stop-loss in a captive is a smart, cost-conscious response to these market conditions.

The second factor is that for a long-time medical stop-loss has largely been considered a first-party risk. Over time, law firms and accounting firms have gradually started to categorize it as a potential third-party risk.

This transition to medical stop-loss being a third-party risk is gaining substantial traction and impacting the way programs may be structured to achieve insurance tax treatment. This concept needs to be individually assessed at the employer level, considering the circumstances of the organization. We highly recommend working with a captive attorney or tax advisor to ensure compliance.
Life and disability

Life and disability are other lines that have changed significantly in recent years. Typically, any coverage subject to ERISA needs to go through a DOL exemption process in order to be placed in a captive. Life and disability are usually subject to ERISA. Historically, the DOL had an expedited process, which allowed employers to submit an application for approval to add benefits to a captive.

In late 2018, the DOL paused this process in order to rethink and better understand how employers are using these benefit lines in a captive. They have since conducted an analysis and created a more streamlined exemption process for which we are already seeing applications flow through the DOL.

As we look to the future, I believe this will encourage more employers to think about life and disability as potential coverages for captives. These coverages not only help employers achieve best-in-class benefits provision, they also support captive insurance structure from a diversification point of view.

Another growing area of interest is the self-insuring of employer-paid disability coverages. This is an extremely useful solution for organizations and is quick to implement, but the feasibility of this needs to be evaluated on an individual employer basis.
Voluntary benefits

While not new, voluntary benefits continue to pick up steam in the market. This trend correlates in part to my first point about a holistic approach, as voluntary benefits can offer a range of different protections that are not part of a traditional benefits package. In this way, employers and employees can address a larger spectrum of health and wellbeing concerns such as vision, financial wellness, or accident insurance, thus creating a more comprehensive program.

Voluntary benefits are an important tool to have as employers fight against rising healthcare costs, as they are a low-to-no-cost mechanism to support employees in managing those increasing costs.

Last, as most voluntary benefits are underwritten at extremely low loss ratios, insurance carriers make a substantial profit from a voluntary benefit that is fully-insured. By utilizing a captive (self-insured structure) for voluntary benefits, the employer can further reduce benefits costs for its employees. It’s a classic win-win.

Conclusion

The “new normal”, whether it feels normal or not, is not on the horizon, but at your doorstep. Cutting-edge businesses are taking a modern approach to address the challenging market conditions while still providing competitive benefits, retaining and attracting talent, and being risk-smart and mindful of their bottom lines.

Thinking holistically and reframing your strategy around medical stop-loss, life and disability, and voluntary benefits are just a few of the ways you can use your captive to stay ahead.

The Benefits of an Employee Benefits Captive

There a range of value-driven reasons for choosing a captive insurance structure for funding your employee benefits. Here I explain some key points of interest.

Placing Medical Stop-Loss Coverage in a Captive

Many employers have seen success in placing their critical medical stop-loss insurance in a captive structure. Here I explain the details.

7 Ways Captives Provide Clients a Competitive Edge

A recent report from AM Best concluded that, based on their ratings, captive insurance companies outperformed commercial market carriers yet again in 2017. This finding was based on a hard look at balance sheet strength, operating performance, and business profiles of captives as compared to their commercial counterparts.

As long-time captive consultants, we’ve seen a range of clients benefit from a captive structure and are well-versed in their advantages. The AM Best report is a testimony to the positive role captives can play and how they’re able to provide a competitive edge to the organizations using them. Some of the key advantages include:

Homogeneous Risks

Whether a Single Parent Captive or a Risk Retention Group (RRG), the insureds of a captive are going to have similar risk profiles and diversity. A Single Parent Captive insures the parent company, so all its risks belong to one entity. RRGs are made up of like companies with similar missions and business products/services, such as a group of universities. In both cases, the homogeneity of risk will benefit the captive by establishing a certain level of predictability which helps with the consistency of rates and an unsurprising loss ratio.

Underwriting Profit/Results

According to AM Best, the Captive Insurance Composite (CIC) experienced a 86.4% five-year combined ratio, while the Commercial Casualty Composite (CCC) had a 99.9% five-year combined ratio. Captives enjoy such underwriting profits for a number of reasons, primarily the fact that risk management, control, prevention and mitigation are all at the heart of the captive’s purpose. Organizations are able to benefit from their own good experience. Captives facilitate transparency and more access to data. This allows organizations to act in a proactive manner and implement risk mitigation and control protocols in an almost real time basis. Comparatively, a fully insured commercial market policy may result in a delayed information transition – most commercial insurance arrangements provide reports a quarter after year-end. In addition, frictional costs are lowered with a captive.

Return on Investment

A major advantage that organizations with captives have over commercial carriers is the opportunity to recapture part of the premiums. Captives require capital infusion to start and get off the ground. The profits/savings from the insurance carrier accumulate in the captive and can, over time, begin to yield impressive returns on investment. Most feasibility studies use an internal rate of return or a hurdle rate to help visualize potential savings. This makes captives a great alternative for deploying capital and earning a consistently positive return on income, in addition to being able to use it strategically for reinsurance purposes.

Another pro of captives is the ability to evaluate their ROI evaluated against their hurdle rate as their internal rate of return. A company can determine if an investment will give them adequate benefit or savings over a given timeframe based on their rate of return, and then decide if that investment is worth following through with, or if another solution is more economically sound.

These factors combined allow captives a healthy sum of capital and positive balance sheets.

Competitiveness

Commercial carriers are sometimes unable to understand the true needs of the insureds and are limited in their offerings. Captives create competitiveness in the market and can compel commercial carriers to offer better terms and costs by virtue of a captive’s existence. In many instances, commercial carriers are threatened by the captive’s ability to take on all the risk and become willing to create quota share arrangements. Captives are a unique, tailored solution for the insured(s) and offer an unbeatable level of customization and very little changes in premiums. They have the ability to insure unique risks and are able to fill in the gaps of coverage where commercial markets are unable to do so.

Enterprise Risk Management

AM Best defines Enterprise Risk Management (ERM) as, “establishing a risk-aware culture and using tools to consistently identify and manage, as well as measure risk and risk correlations.” An organization that utilizes a captive is likely to have a stronger ERM system in place, when compared to its captiveless peers, since it is partaking in its own experience and thus is more motivated to better manage its risks. In most cases, the captive is a vital cog in the ERM wheel. This close alignment allows for better results for both parties, and a lower total cost of risk for the captive.

Retention

Many rated captives have a retention rate of 90% or higher. This is, in part, because policyholders are routinely rewarded through dividend payments from the captive that are significantly higher than any seen in the commercial market. These profits can be used in a multitude of ways to further benefit the captive. For example, policyholders could underwrite additional lines of coverage without the need for more capital, or provide premium holidays on programs, or fund FTEs.

This, combined with the lack of competition means that captives don’t need to shop around for business each year, creating savings in acquisition costs which can then be returned to the captive (e.g. in the form of loss control) to further benefit the insureds.

Ability to Identify Emerging Risks

A captive’s structure and foundation in ERM gives it an added advantage of foreseeing emerging risks. Typically, all key stakeholders and the entire risk team of an organization will be involved in the captive’s management and activity. Having a strong alignment between the parent company, the captive, the IT team, the risk experts, the actuaries and other main players means that everyone is on the same page. A captive can make long-term assessments while also flagging and resolving issues quickly. There is no fragmentation of knowledge in a captive setup, and all stakeholders have the same interests. In sum, captives allow organizations to be nimble and react to changing market conditions quicker than commercial market carriers.

Conclusion

As AM Best states, captives performed well in 2017, as did RRGs, and it’s projected that success will continue into 2018 and beyond. The US captive market has grown substantially over the past few years, with domiciles like North Carolina and Hawaii experiencing an uptick in captive formation. Further, we’re seeing captives being used more frequently for nontraditional lines of coverage, such as cyber and medical stop-loss, adding to the list of use cases.

Captives are a great tool for insureds to create unique, custom-made solution in partnership with the commercial markets. They facilitate better management of claims – their expenses and adjustments – through accurate estimations.

Lastly, one of a captive’s most important attributes is its flexibility and ability to be swift and proactive, without the typical issues in a commercial insurance relationship.

Don’t Risk Missing These 3 Hot Topics from RIMS

Each year, the Risk Management Society (RIMS) hosts one of the largest industry events. The annual conference and tradeshow brings together thousands of insurance and risk experts, and for the 11^th year in a row, the Spring team was among them. We were happy to take a break from Boston’s not-so-springy weather and head to San Antonio for RIMS 2018.

Over the course of the 3-4 days, I was able to a) meet and greet insurance colleagues, both new and familiar, b) party like a true Texan (in case you thought Risk Managers would make for a dull crowd – you may want to rethink this notion), and c) get a gauge on the most popular industry trends and concerns.

For this writeup, I’m focusing on point C, because between various networking and social events, there was a lot to learn at the RIMS annual conference, and I’d love to share some takeaways. Here are the most buzz-worthy topics, in my opinion.

Cyber & Tech

As it has with conferences and news headlines over the past 5-10 years, technology took center stage at RIMS. However, I’m using “technology” as an umbrella term to represent a range of digitally-centric, Internet of Things (IoT) subjects, such as:

a) Cyber

During Berkshire Hathaway, Inc.’s annual shareholders meeting, Warren Buffett Chairman, President and CEO said, “Insurance is very early in the game in determining how to cover the risk of data breaches, ransomware and other hacking perils”. He then went on to say that the risk itself is a “very material risk” that didn’t exist 15 years ago one that will get worse. The world of cyber threats and attacks continues to keep risk professionals up at night. From my actuarial perspective, the probability and severity of cyber loss events are becoming better understood, although there still is tremendous uncertainty due to the rapidly changing nature of the risk. The following Cyber sessions were presented at RIMS:

In “Are You Prepared for a Cyber Extortion Event?”, audiences were walked through different ransomware threats and a checklist for getting through such an attack.
Jason Trahan went into further detail in explaining the “Anatomy of a Cyber Event Claim”, which provided a preparation process for cyber claims as well as an extensive list of possible claims expenses.
A representative from Willis Towers Watson highlighted the importance of corporate culture when it comes to combating cyber risk.
A woman from The Washington Post Risk Management team led a discussion on the different insurance policies that intersect when it comes to cyber risk, and how to manage these overlaps.
Jeffrey Sharer of EY revealed some startling statistics such as: “89% say their cybersecurity function does not fully meet their organization’s needs”.
Joon Sung and Kevin Kalinich stressed the importance of recognizing and addressing your third party/vendor cyber exposures, nothing that cyber resilience is not just an internal matter.
During “Pay Up or Else: Ransomware Risks”, John Coletti and Anna Ziegler explained the latest trends and scams in the ransomware sphere and offered advice on how to be both proactive and reactive.
One session focused on communicating a cyber attack to your C-suite, board of directors, and/or other superiors. Ten best practices were shared, such as: “Have a customer notification plan and procedures in place.”

b) Autonomous Vehicles

In March, a self-driving Uber car killed a pedestrian in Arizona, and an autonomous Tesla vehicle caused another death in California. These two incidents are just a couple of many news headlines involving self-driving cars, which certainly pose a variety of risks. As such, they were discussed on several occasions at this year’s conference.

In a session entitled, “Driving Insurance Forward”, Katherine J. Henry provided an overview of how autonomous vehicles are covered, the consequences they can bring and ways to confront this emerging risk.
Representatives from Liberty Mutual and Ford Motor Company teamed up to explain the different industries that will be affected by the rise in self-driving cars, from oil to advertising companies. Their presentation spoke to the broader trend of disruption in the automotive industry, pointing out 4 facets to consider: autonomous driving, electrification, connectivity, shared mobility/economy.

c) Social Media & Mobile Apps

Considering the recent Facebook privacy scandal, it was important to look at social media and mobile issues from the perspective of risk management and mitigation.

Gregory Bangs of XL Catlin spoke to the topic of “Social Engineering”, which can incorporate a range of scams such as vendor impersonation and malware. He explained what these fraudulent activities can look like and their implications for insurance coverage and employee preparedness.
In “Swipe Right on Insurance”, Cort T. Malone and Stephanie Hyde discussed the risks and insurance options related to social media platforms and mobile apps, as used by employees. They covered things like harassment, privacy, reputation, business torts, intellectual property and the regulatory environment.

d) Wearables

Thomas Ryan highlighted the opportunity a “wearable” device poses from a workers’ compensation coverage standpoint and guided the audience on selecting a wearable vendor for corporate use.
Two experts from Modjoul Inc. and Cotton Holdings Inc. explained wearables in detail – why use them, how to use them, how they work with insurance carriers, etc. Through a case study, they also endorsed wearables as an option to keep employees safe and productive.

e) Drones & Other Tech Matters

Chris Proudlove of Global Aerospace and Vincent Monastersky of Fox Entertainment Group presented the challenges and opportunities associated with the widespread growth of drone use, both commercially and personally. It turns out, over 75% of drone-related claims were caused by operator error. Further, they outlined coverage types and options.
A session on emerging technologies, including smart sensors, wearables, drones and artificial intelligence gave audiences a broad but detailed landscape of how all of this connectivity affects the “risk ecosystem”, and tips on how to prepare for the future.
Another discussion, led by Tim Yeates, covered the “Fourth Industrial Revolution” and the benefits and risks of the level of information being shared today. Thought-provoking questions like, “Who do we trust – human intelligence or artificial intelligence?” were posed.

Natural Disasters

In 2017, the U.S. was hit hard with Hurricanes Maria, Harvey and Irma as well as wildfires in California. Outside the U.S., the Caribbean was crushed with those same hurricanes, a devastating earthquake hit Mexico, extreme flooding impacted areas like Bangladesh and Sierra Leone, and areas of China suffered from landslides and typhoons. Unfortunately, this is not an exhaustive list.

As risk professionals we need to look at these occurrences from a different lens, so it was no surprise that the word “catastrophe” was rampant at the RIMS 2018 conference.

Stephen Moss explained the anatomy of a catastrophe risk model and pointed out the large protection gap, noting that about 50% of the losses incurred from 2017’s most impactful natural disasters were uninsured.
An attorney from McCarter & English, LLP focused on business interruption losses resulting from catastrophic loss, discussing pitfalls that could cause your claims to be undermined as well as best practices for getting coverage.
Robert Nusslein of Swiss Re explained parametric natural catastrophe insurance for hurricanes and earthquakes, how it differs from traditional insurance and how it can help fill in gaps.
In “The Future of Climate Risk Management”, audiences learned about their company’s climate risks – the size, scale, complexity and reach. Then, the speaker introduced solutions and tools for such risks.
James Pierce spoke on “Mother Nature’s Onslaught” and speculated on whether a new norm is needed in combatting natural disasters.
One session, “The Sky Fell”, went into further detail on catastrophic claims: common claim mistakes, communication issues between layers of insurance, crisis management tactics, TPA management and more.
The CEO and Founder of Orbital Insight, a geospatial analytics company, outlined how technologies like satellite and drone imagery as well as AI and cloud computing can provide insight into catastrophic risk assessments. He even showed audiences imagery showing flood detection for Hurricane Harvey, as one of several illustrations.

Compliance

Compliance is always a key concern in this industry. What changes year to year are the specific areas of compliance focus, some of which are below.

Lisa Kerr and Bruce Wineman led a session on multinational program compliance – highlighting regulations, tax law, offshoring and variability as things to look out for.
A different presentation focused on Medicare and Medicaid compliance, going over the boatload of associated acronyms, lien compliance, reporting and what to look for in a partner.
In “Risk Management, Compliance and Preparedness”, attendees received an overview of SRM and ERM, examples of strategic risk, automation advice and more.

If you were able to make it to the RIMS conference this year, I hope this helps you retain they event’s key takeaways. If you couldn’t make it to San Antonio, well, now it’s almost as if you were there!

Please feel free to reach out with any questions, actuarial or otherwise. In the meantime, put RIMS 2019 on your calendar – April 28^th – May 1^st – in Boston (our backyard). We’re already excited for it!

Spring to Sponsor RIMS 2018 Annual Conference

Spring team at RIMS 2017

It’s been a busy conference season for us here at Spring, and it’s not over yet! We are excited to be sponsoring and exhibiting at this year’s RIMS (The Risk Management Society) annual conference in San Antonio, Texas from April 15th – 18th. Spring has been actively involved with the RIMS organization for over a decade and we are pleased to continue this partnership. Further, after having just endured three Nor’Easters in a two-week span, we are ready to pack our bags for warmer weather!

The event boasts an incredible turnout each year, and we’re sure this year will be no exception with an expected audience size of almost 3,000. This ties in well with the 2018 theme, “Go Big.” RIMS is one of the best events for risk managers to network, learn and share ideas. The four-day conference combines a good mix of work and play and brings an impressive list of talent when it comes to speakers and content. We’re particularly excited to see Jay Leno!

If you’re reading this, there’s a decent chance you will be at RIMS too, so please don’t forget to come say hi to us at booth #753. We’ll have giveaways, raffle prizes and more, and we’d love to chat with you!

Watch the Webinar: Time for a Captive Checkup?

Most of us stay on top of things like dental cleaning appointments and routine car maintenance without giving it much thought, but we’re afraid a lot of companies aren’t treating their captives the same way. Our team recommends regular “captive check-ups” every few years for a variety of reasons, and have a clear, proven system for taking organizations through this refeasibility process.

Spring Partner and Chief Actuary, Steven Keshner, along with our Senior Actuarial Consultant and property & casualty expert, Peter Johnson, led an educational session on captive optimization through

refeasibility studies. With a combined 40 years of experience in the insurance, actuarial and captive industries, the two have a wealth of knowledge to share, and we wouldn’t want you to miss it.

Fill out the form below to view and listen to our webinar, “Time for a Captive Checkup?” which was conducted live in September of 2017. You’ll take away valuable learnings, such as:

The importance of refeasibility and the different factors that make it necessary
A recommended, step-by-step refeasibility process including suggested strategies, modes of measurement, and how to piece everything together
Questions to be answered through your captive check-up
Resources for getting started

Your Captive is Riding High. Now What?

You’ve had your P&C captive for years and it has continued to perform well throughout. So what is next? How do you capitalize on this success and build on your captive or rebuild an underperforming aspect of it?

Enter refeasibility.

Much like your family car, a captive should have a check up on a periodic basis. Are you writing the right lines in your captive? Are you in the right domicile? Would a different structure be more profitable? Would other service providers make a difference? Have your claims changed significantly? Have regulations changed over the years? All this and more can be answered with a good review of your captive by a professional consultant.

Here are a few things to consider as you ponder a refeasibility study:

Domicile:

The Dodd Frank Act changed the landscape for a lot of captives. Rather than incur a self-procurement tax for risk out of state, some captive owners are redomesticating their captive back to their corporate home states or establishing a fronting captive in that domicile to lessen the premium taxes due. An additional dimension in captive domicile selection is the enormous growth in U.S. domiciles. Countless states have recently set up new domiciles and there are still many quality offshore options. You’re pretty sure you are in the right spot, but a “refeasibility” might show you otherwise. For example, some states have created innovative cell legislation that might work for you or your clients. Some assets held in the captive maybe more liberal, so depending on what you are using for collateral, states need to be studied for the best match.

P&C Programs:

Ten years ago there were pretty much only large P&C captives writing pretty much only property, general liability and workers compensation and occasionally a rouge auto or warranty program. Captives stuck to high deductible programs and some small quota share coverages to fill out a line slip.

Today, you can write almost anything that is an insurable risk and makes good business sense. You still can’t write lines of coverage that just don’t make sense (like tidal wave coverage in Kansas), but you have a great deal more flexibility and room to be creative in how you define and insure your risk.

Contingent business interruption is sometimes an uninsurable or underinsured risk, and a good candidate for the captive. Some use their captive to front their global or international property program, selling off pieces out the back and taking a nice fronting commission for themselves: the market would have gotten this if they didn’t. Others write business specific coverage like lost in hole drill coverage for oil companies.

Cyber Risk:

Cyber risk is another good candidate for a captive. Cyber insurance in a captive insulates an organization from the market becoming less competitive in the future. It also gives a captive owner a great opportunity to diversify their existing captive portfolio. The captive can also be used to provide coverage that might not be really available in the market, such as future lost revenue of first-party loss of inventory due to technology failure.

Benefit Programs:

Now we have benefit programs that are really taking off as captive programs. Prefunding retiree medical, group term life, medical stop-loss coverage, foreign coverage are just a few of the programs that make sense to add to the captive portfolio. And with some of these programs, the premiums qualify as third-party business and may boost your captive returns with a positive tax affect.

Additionally, for U.S. employers, the regulatory hurdles to funding ERISA-covered benefits in a captive have never been lower with the renewal of the expedited process for securing a prohibited transaction exemption. Couple that with the growing costs (and concerns) surrounding the Affordable Care Act in the U.S. and now is clearly the time to at least be considering funding benefits in your captive.

Find out more about funding benefits in a captive here.

Conclusion:

Regardless of how old or new your captive is, there are a number of internal and external factors that have changed since it was created. Now is a great time to have a professional come in and not only take a snapshot of how your captive is currently performing, but also help you project and strategize where your captive should be in the future. Now is a great time for a captive refeasibility study.

If you agree that it is time to re-evaluate your captive, Spring is poised to step in and help out. Our team of captive consultants, actuaries, underwriters, strategists, accountants and lawyers have decades of experience helping companies similar to yours not only set up their captives, but also conduct through and thoughtful refeasibility studies, which have helped our clients realize continued success with their captive.

Find out more about Spring’s Spring CARE captive optimization product and related services here.

Please contact us using the form below if you’d like to chat with a member of our team about your captive’s current and future performance.

« Previous

COVID-19 impacted insurance coverages and industries differently, but a picture is emerging of what the employee benefits landscape will look like post-pandemic, says Prabal Lakhanpal of Spring Consulting.

A holistic approach

Medical stop-loss

Life and disability

Voluntary benefits

Conclusion