In a recent podcast from the International Risk Management Institute (IRMI), or Chief P&C Actuary, Peter Johnson gives an inside view into the actuarial methodologies that go into calculating loss development patterns and optimizing risk management strategies across long-tail lines. You can find the full podcast episode here.
Spring has won Captive Review’s US Awards the top Captive Consultant of the Year. You can find the full list here.
Our captive team joined the Global Captive Podcast to record an episode reviewing Spring’s recent efforts in securing tentative authorization for a client from the Department of Labour regarding an ERISA exception for a pension risk transfer. You can find the full podcast episode here.
Spring recently published an article on Captive.com illustrating 7 ways captive insurance can benefit organizations. Check out the full article here.
One of the most exciting attributes of captive insurance is that every program looks different. There is so much variety and a wide range of ways to structure coverage and utilize surplus. I have been talking with captive owners representing various industries, organizational sizes, and stages of captive maturation to get their unique stories and understand how they are putting their captive to work for their specific risks. Indeed, no two stories have been the same.
In a recent interview, I sat down with Karen Hsi, Executive Director, Captive Programs at University of California Office of the President, and one of the sharpest minds of young captive talent. The University of California (UC) did not need to obtain Department of Labor (DOL) approval for their captive programs, making the process simpler!
Q: What benefits do you currently have within your captive, and why did you choose the captive path?
A: On the employee benefits side, we have voluntary benefits – accident, critical illness, and hospital indemnity – in our cell captive. This program has been in effect since the start of 2020 and uses a fronting carrier, and as of this year (start of 2024), it is 100% seeded to the cell captive.
We brought these products into the captive because we wanted to customize offerings and add some bells and whistles for employees at a better price. We used a cell captive so that we wouldn’t jeopardize the tax status of our single parent captive. Our original goal with this strategy was not to make money but break-even while primarily to be able to offer better benefits.
Over the course of time we have been able to build a stable program, and after shifting away from a broker structure so that commissions and other costs are stripped out. As we establish these financial efficiencies, we want to keep building upon the program either by reducing employee costs or by further enhancing or customizing offerings. For example, one unique benefit that we were able to add with our surplus is a mammography offering within critical illness. We found that utilization was high, so we are confident it adds value to employees. Another policy we were able to add into the supplemental health program was a COVID-19 rider, which had a cash incentive for employees to proactively get tested for the virus. We were able to put this in place quickly and think we would have had a hard time doing so without the captive.
Overall, we have seen about 20% savings with this program and as things stabilize, we hope to lower rates further for employees.
Q: Are there any other benefits UC has in a captive?
A: We write life insurance – employer and employee paid – in a separate cell captive because it is large enough for its own cell. The life cell captive also launched in 2019 and is doing well, with approximately $16.3M in accumulated earnings since inception. During the pandemic, we had a fair amount of turnover, so we used the success of the captive to boost our life insurance policy as a tactic for succession planning and business continuity.
We hope to someday to move disability into the captive, but the timing hasn’t been right yet. We want to better manage the risk first so that the board is more amenable to bringing it into the captive.
Q: Any other surprises?
A: I think in the beginning it was a mindset and relationship change when we shifted things with the carrier to move to a fronting company. They now have a seat at the table and we have a longstanding relationship.
Q: Anything interesting on the horizon?
A: We are looking into the potential of long-term care insurance in a captive. There also might be an opportunity to rent out a cell captive to one of our sister/affiliate organizations (e.g., California State entities), where they have their own cell and voice and where we can provide resources. I think this might be a beneficial move and would be a valuable way to collaborate.
No matter what the future brings, I know that we are not done yet (with growing our captive programs), and we’re excited to see what else we can do. I appreciated the time Karen spent in chatting with me and will be paying close attention to these exciting developments and opportunities to expand their captive. If you’re looking for expert advice to assess feasibility of additional benefits in your captive, feel free to get in touch with our team.
The United States Department of Labor (DOL) has tentatively authorized an Employee Retirement Income Security Act (ERISA) exemption regarding pension plan risk transfer to a captive. This healthcare network is the first organization in history to receive ERISA approval to transfer pension risk in a captive. This is groundbreaking news, as it opens the doors for plan sponsors to better manage their risk related to defined benefit pension plans programs. In short, using captive insurance companies rather than traditional insurers alone gives plan sponsors the opportunity to fund their pension risk more cost effectively.
Their employees engage in groundbreaking cancer research and provide lifesaving care for patients. The employer engaged with Spring, to help design and implement this unique program for its retirement benefits. This included conducting actuarial analyses, navigating vendor and partner avenues, structuring transaction and direct contact with the DOL to work through the exemption process. Once approved, the employer is anticipated to receive $126.4 million in financial benefits from the DOL. As part of the terms of the exemption, the employer will be providing a one-time cost of living increase to the monthly retirement benefit to all plan participants and beneficiaries.
This is a groundbreaking next step in the evolution of risk management programs and set the stage for many other employers who are trying to structure a better program for their employees.
We’re excited to announce that Spring has been shortlisted for top Actuarial Firm and Captive Consultant in this Captive Review’s 2024 US Awards. Check out the full list of nominees here.
Our Managing Partner, Karin Landry has been featured among the top Influential Women in Captive Insurance by Captive International. You can find the full announcement here.
Every industry has its own challenges and nuances. Since our client base is widely varied, we routinely partner with our clients to tackle unique, industry specific obstacles as they build out customized employee benefit programs and strategies. When it comes to the airline sector, a specific pain point relates to adequate long term disability coverage for their licensed pilot employees.
Background
Pilot union contracts typically require airlines (the employer) to provide long term disability (LTD) insurance to their pilots, but this coverage has become nearly impossible to procure in the traditional LTD market, for a range of risk reasons:
- Volatility and financial hardships in the airline industry, with bankruptcies and federal bailouts not uncommon
- Pilot unions, such as ALPA, APA, and SWAPA, can be litigious in fighting for their members, making pilots less favorable in the eyes of insurance carriers
- Federal Aviation Administration (FAA) oversight regarding the fitness of a pilot complicates claims processes
- The nature of the job poses special risks, including:
- Consistent exposure to high altitude
- Safety considerations
- Prone to illness or injury due to physical and mental demands
Pilots are humans like the rest of us, but given the stressful nature of their job and the consequences of their environment, they might be in greater need of LTD coverage than the average worker. For example, the FAA estimates the prevalence of substance misuse is 8.5% among pilots, with other sources placing that rate as high as over 15%1.
Sensibly, the FAA’s regulations around pilot licensing are very stringent, so there is a large risk that a pilot will lose their license over a medical condition, including the substance issues referenced above. As a result, the gap in the market for conventional LTD coverage has yielded a specialty market specific for pilots, which is based on the loss of a pilot’s license instead of the traditional definitions of disability, which are based on the ability to perform either the material and substantial duties of one’s own occupation or any occupation which could be reasonably expected to perform in light of their background. Since these loss of license plans are generally structured either as a monthly benefit while a pilot is grounded or as a lump sum, pilots who do not lose their license essentially have no product option available that provides income replacement as a traditional LTD plan would. In addition, even when the specialty coverage would provide a benefit, it is limited in availability and, with very little competition, premiums are high and there is minimal, if any, room for customization.
Potential Solution
At Spring, we often say that captives are the whiteboard of insurance, meaning that they can be leveraged and crafted in a diverse range of ways to solve for unique and evolving challenges. LTD coverage for pilots can be added to that whiteboard.
Most airlines currently have a captive insurance company, which they may only be utilizing for property and casualty (P&C) lines of coverage. Even when an airline does have employee benefits in their captive, they are typically not leveraging the captive for long term disability insurance or other voluntary benefits.
Long tail risks such as disability are particularly beneficial for captives. Traditionally, when premiums are paid to carriers they hold and maintain any investment income earned on reserves. When funding these long-term liabilities through a captive, the investment income earned is held until the time of loss and stays within the captive. These investment returns are substantial and serve as yet another benefit for placing disability coverages into the captive.
Having employee benefits (including LTD) in a captive provides the following advantages:
- Cost savings and improved cash flow
- Increase cost certainty and support budgeting
- Reduce operating costs
- Control over underwriting and funding
- Flexibility in terms and conditions
- Better claims management
- Improved access to data
The biggest benefits for airlines placing LTD through their captive program is creating greater control of customization of coverage and are less susceptible to market volatility and pricing by moving away from the commercial market.
Having a combined P&C and employee benefits captive program, which incorporates LTD, would further strengthen the airline’s overall captive and risk management strategy by offering risk diversification, since LTD risks are unrelated to the existing P&C risks underwritten in the captive. Along with projected increased profits of the LTD line of coverage, this approach increases the number of statistically independent exposures, which improves the stability of the overall program. In addition to LTD, medical stop loss could also be added to the captive to protect against catastrophic claims and create more predictability.
Action Plan
LTD insurance for pilots has been an issue for years in the airline industry, and no optimal commercially available solution has come forth. Captive insurance has long been a strategic approach to niche or especially challenging insurance obstacles and essentially how and why captives were born. The LTD commercial market is prime for disruption, and for those willing to move towards a more flexible and beneficial program, a captive insurance company can provide an answer.