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:

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:

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.

1 https://thehill.com/opinion/healthcare/4336555-the-faa-must-prioritize-pilot-well-being-to-improve-flight-safety/#:~:text=The%20FAA%20estimates%20the%20prevalence,identify%20these%20grave%20health%20concerns

For the first time, 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. Spring worked directly with this client through the process and once approved, the client is anticipated to receive $126.4 million in financial benefits from the DOL. Check out Captive Intelligence’s full article here.

Since I started my career in this space many moons ago, I have seen the captive industry continuously grow and evolve. There have been new risks, changes in regulatory and Department of Labor (DOL) policies and protocols, economic fluctuations, the addition of technologies, and the integration of captive programs focused on different lines, whether employee benefits or property and casualty (P&C). As I believe we are at the cusp of the next era of change for captives, I wanted to connect with captive owners and risk managers to gather their outlook on where we are today and where we’re headed.

I sat down with David Arick, who is currently the President of RIMS, the risk management society® and Managing Director, Global Risk Management at Sedgwick. He has previously held insurance and risk management roles at companies like International Paper and General Electric, and brings forth a wide range of experience spanning decades.

Q: How has the hard insurance market impact risk professionals’ ability to financial cover their organizations’ top risks?

A: Different industries have had different experiences in this market. My last job was in the packaging and forest products industry and it, along with other sectors like transportation, have been challenged. The hard market coupled with specific insurance conditions like nuclear verdicts and natural disasters on the P&C side have been driving up property costs. Cyber insurance has also faced obstacles. The economics of a specific company along with the insurance budgets that get blown out of the water really have people looking for alternatives like captives.

Q: What do you feel are some of the contributing factors that have led to the increased popularity in captives?

A: Aside from what I mentioned above, captives are no longer uncommon or kept behind closed doors; they are now a part of mainstream risk management and C-suites are willing to make the investment given the volatile insurance markets they are facing.

Q: What benefits are most appropriate for organizations to place in their captives? Have you seen any new developments in this area?

A: From a risk management perspective, I hear my fellow risk managers talking about three areas where benefits and captives can interplay:

  1. Global benefits. Risk managers are hoping that captives can help stabilize programs that historically were variable and volatile across different countries, particularly with a workforce moving between countries.
  2. Medical stop-loss. Captives are playing a huge role in this area where a risk manager can partner with HR in understanding stop loss buying options available thanks to the captive and also creating savings and flexibility within the program.
  3. ERISA benefits. Multinational companies have been focused here in terms of trends, take-up rates, etc. Benefits spend in the US is more significant than in other countries and to that end there is renewed interest in utilizing a captive to address these rising costs.
Q: I’ve heard you say before, “risk management is much more than buying insurance or financing losses,” can you elaborate on that statement a bit?

A: Both risk management and insurance buying are critical aspects of running a business. The point is that I would hope that risk management could be more strategic, aimed at creating risk awareness and focused on people, processes, and technology in addition to the more traditional items like mitigation plans, business continuity and the like.

Q: This year, as RIMS President, what are some of your priorities for the organization and the risk management profession overall?

A: I would like to improve the perception of risk management by increasing education and development for those in the field, so that we can more broadly speak the same language. RIMS has developed a global certification for risk management education called the RIMS-CRMP that is ANSI-accredited and meant to build credibility around the profession. We are investing in our future by highlighting the careers available and introducing risk management curricula to more colleges and universities. It’s important that we routinely assess how to support new talent that joins the field in their professional growth and that is what we’re focused on. 

Q: What insights can you offer a risk professional who is either considering starting a captive or who has just started one?

A: I promise you didn’t make me answer the question in this way, but I truly think organizations need to search for the best captive advisors and not just default to their primary brokerage team. An existing team may be sufficient in handling most needs, but a captive is unique and you need an expert team in place, from consultants to lawyers, to captive managers and the like. Secondly, I will say that a risk management professional needs to prioritize building internal support and alignment for an initiative like a captive, including finance, accounting, treasury, legal, and tax. Internal buy-in is critical to long-term success.