Captive International has released the winners for the 2024 US Awards. Spring is proud to announce that our team has been recognized among the best in the industry for Top Feasibility Study (Firm), Top Feasibility Study (Individual) and Top Captive Consultant (Individual). You can access the full list of winners here.
Workforce populations tend to be diverse in terms of demographics as well as other factors such as geography. This is one of the primary reasons healthcare programs are aligned with and sponsored by employers. These programs aim to achieve high enrollment to accommodate the demographic diversity among members. This, in turn, creates a system where the highest utilizers are subsidized by the leanest. There are several typical drivers that affect utilization: age, gender, morbidity, family size, etc. For mature populations participating in employer-sponsored healthcare programs, new hires with more favorable demographic characteristics help offset rising costs for aging employees, providing a consistent balance between those subsidizing and those being subsidized.
One of the largest demographic drivers of cost is age. As age increases, so do costs. When a population has aging members staying on well beyond 65, it becomes difficult to maintain the same influx of younger members to offset these rising costs. There are many industries where employees tend to work beyond age 65, such as education, public administration, and real estate. Additionally, due to rising retirement costs and increases in the cost of living, it has become necessary for many individuals to work beyond the traditional retirement age. The result is an average age that dramatically increases over time and average plan costs that outpace already burdensome medical and pharmacy trend rates.
How can we control these ongoing costs?
In general, there are many levers typically used to control healthcare costs. Many of them still make sense in the present environment, though they may be unattractive in a competitive employment situation. Examples include increased employee cost-sharing, leaner healthcare offerings, more stringent participation requirements, disease management, utilization management, and leaner pharmacy formularies.
How can we specifically address older members?
In the case of consistently increasing average age, these cost-control approaches may be temporary and insufficient. Further steps may include such approaches, but employers may also seek to decrease the number of older members remaining enrolled in the plan. Some specific suggestions include:
- Salary-banded employee contributions – This involves charging scaled contributions to members based on salary ranges. While this will not directly address older members, they tend to have higher salaries.
- Enrollment in Medicare – Increased Medicare enrollment could significantly mitigate post-65 costs. One potential approach, though often considered unattractive, is to move to a leaner pharmacy benefit for the active plan. If the pharmacy benefit is not as generous as contemporary Medicare Part D benefits, Medicare-eligible members will have to enroll in Medicare or pay a scaled penalty when they eventually do register, based on the number of months they were not enrolled.
- Offer an active stipend or payout – Some employers offer an annual or monthly stipend for not enrolling in an employer-sponsored plan, which may encourage members to seek coverage elsewhere. It could also make sense to offer a one-time lump-sum payout to help partially cover some of the estimated $165,000 (per Fidelity1) per individual for post-retirement healthcare costs.
- Offer post-retirement medical – One reason members remain in the workforce into later years is the challenge of acquiring and affording medical benefits after retirement. A post-retirement medical benefit is a large and expensive undertaking, but there can be more controllable mechanisms that limit costs to predictable amounts. A specific example is a defined contribution-type plan, where an explicit subsidy helps offset ongoing costs. This can be based on various factors to yield a predictable set of costs.
In summary, mitigating the increase in medical and pharmacy costs over time is already a significant challenge for employers, and aging populations can exacerbate these increases. It’s important for employers to address these issues head-on or face financial headwinds that could impact their stability. Please reach out to our team to explore these solutions further.
On September 1, 2024, we celebrated a significant milestone: the 50th anniversary of the Employee Retirement Income Security Act (ERISA). Signed into law by President Gerald Ford on September 2, 1974, ERISA has quietly yet profoundly impacted the lives of countless Americans, ensuring that promises made regarding retirement and health care benefits are promises kept.
ERISA: A Commonly Overlooked Law That Impacts You
While the average American may not recognize the name, ERISA likely plays a crucial role in their lives. This landmark legislation sets minimum standards for most established retirement and health plans in the private sector, providing essential protections for plan participants and beneficiaries in employee benefits plans. From safeguarding retirement savings to ensuring that benefits regulations and requirements are adhered to, ERISA has been a cornerstone in the benefits industry for the past five decades.
A Journey Through ERISA’s History¹
The story of ERISA began with a series of broken pension promises that left thousands of employees without the benefits they were owed. The most notable case was the closure of Studebaker’s South Bend, Indiana plant in 1963, where workers were denied the pensions they were promised. This incident, among others, underscored the urgent need for pension reform and captured the public’s attention.
In response, President John F. Kennedy created the President’s Committee on Corporate Pension Plans in 1961, which issued its report in 1962. Senator Jacob Javits introduced pension reform legislation in 1967, and the momentum continued to build, especially following the release of the 1972 Peabody Award-winning documentary, Pensions: The Broken Promise. Public hearings were held, legislative efforts advanced, and finally, the Employee Retirement Income Security Act was signed into law in September 1974.
Senator Javits, the principal sponsor of ERISA, described it as “the greatest development in the life of the American worker since Social Security.” ERISA has shaped how employers provide retirement and health benefits, working behind the scenes to set standards that protect millions of workers and their families. ERISA was passed by the House in a vote 407 – 2 and unanimously approved in the Senate demonstrating how united the country was behind this important piece of legislation.
The Evolution of Employee Benefits and Captives
ERISA’s influence extends beyond traditional employee benefits. Over the years, there has been notable growth in employee benefits provided through captives—specialized insurance companies owned by the businesses they insure. This trend has enabled companies to have greater control and flexibility over their benefits offerings while managing risks more efficiently. Not all benefits are subject to ERISA, as seen below, but if they are, they need to go through a filing process with the Department of Labor (DOL) to receive a prohibited transaction exemption (PTE). The goal of the PTE process is to ensure that the interests of plan participants in the captive model are still protected, through an additional layer of DOL oversight surrounding fair pricing and compliance.
As captives grow in popularity, they provide new opportunities for employers to offer competitive, tailored benefits while achieving cost control—a trend ERISA has helped enable by providing the regulatory framework necessary for captive expansion and innovation.
Looking to the Future: ERISA’s Continued Relevance
Fifty years on, ERISA remains as relevant as ever. A recent example of ERISA’s modern influence is the tentative approval given by the DOL to leverage a captive to fund pension plan risk for the first time. This development benefits both plan sponsors (employers) grappling with pension plan liability and benefits recipients.
As we navigate new challenges in the benefits landscape—from evolving retirement needs to the complexities of modern healthcare—ERISA provides a foundation that ensures the rights and protections of millions of Americans are upheld.
1 https://www.dol.gov/agencies/ebsa/about-ebsa/about-us/history-of-ebsa-and-erisa
As Vermont was named the largest captive domicile globally in 2022, it has developed into a hub for alternative risk financing and insurance innovations. The Vermont Captive Insurance Association (VCIA) recently hosted its 2024 Annual Conference, a beacon in the captive insurance industry. This year’s conference, held in the heart of Vermont (Burlington), offered a dynamic platform for industry professionals to delve into the evolving landscape of captive insurance. From exploring the fundamentals of captive formation to addressing the pressing challenges posed by emerging technologies and regulatory changes, the conference provided invaluable insights and strategies. Attendees had the opportunity to engage with thought leaders, share best practices, and discover innovative solutions that will shape the future of the industry.
1) Captive Formation and Feasibility
Since Vermont is the most popular domicile globally, VCIA provides a great avenue to help first-time employers explore potential captive endeavors. Understanding the basics of captive formation and testing for feasibility is essential for anyone looking to establish or manage a captive insurance company. Here are some related sessions that caught my eye:
-The opening session, “Captive Immersion: Feeling Puzzled? Let’s Piece It Together,” brought together various stakeholders, including an attorney, underwriter, actuary, consultant and a state official to give piece-by-piece instructions on entering the captive industry.
– The presentation, “The Economic Landscape & Your Captive’s Investment Portfolio,” reviewed the current state of the economy and macroeconomic factors that may influence investment gains in a captive.
2) Emerging Technologies and Innovation
As the risk landscape evolves rapidly, captives must adapt to emerging tools and technologies. Addressing emerging risks such as cyber threats and leveraging innovations like AI and data analytics are vital for maintaining relevance and effectiveness in risk management, ensuring captives can proactively manage and mitigate modern challenges. These presentations spotlighted the need for alternative solutions to address emerging (and at times unforeseen) risks:
– The Cost of Compliance: ADA/FMLA Court Cases and Jury Verdicts offered a deep dive into recent legal cases, providing lessons on how to avoid costly compliance mistakes.
– The presentation, “Your Data Reimagined! A Captive Case for Data Visualization,” showcased how employers can utilize data visualization to help interpret large data sets and areas for risk optimization.
3) Regulatory and Compliance Updates
Navigating the complex regulatory environment and staying updated on captive taxation and oversight changes are crucial for compliance and strategic planning. It is essential that captive managers and owners are informed about regulatory requirements and can adapt their practices to remain in good standing and avoid potential legal pitfalls. Some insightful sessions include:
– Our VP, TJ Scherer, teamed up with the State of VT’s Dan Patterson in an open discussion group to chat about “Upcoming Changes in Regulation Oversight” and what captive owners in VT should keep their eyes out for.
– Four tax experts convened to discuss “Captive Taxation: What’s New & What’s Next.” They reviewed recent IRS, federal and state updates and discussed how companies can best prepare for an IRS audit.
4) Passing the Torch
Energizing new leaders and providing growth opportunities for newcomers are essential for the long-term sustainability of the captive insurance industry. By fostering new leadership, organizations can drive future success and address the ongoing challenge of talent shortages. These topics focused on the importance of developing talent to ensure that fresh perspectives and innovative ideas are woven into the industry:
– State of VT’s Chief Examiner, Heidi Rabtoy’s “Discussion Group: Attracting & Energizing New Leaders” spotlighted the current talent shortage in the insurance space, and tips to attract and retain next-generation industry leaders.
– One of my favorite parts of VCIA is the Newcomers’ Orientation; ensuring first-time attendees are educated and feel welcome is essential to the industry’s future success.
The enthusiasm and forward-thinking discussions from this year’s conference left a lasting impact on the captive insurance landscape. The conference highlighted the importance of understanding the fundamentals of captive formation and staying ahead of emerging risks, underscoring the critical need for compliance amidst shifting regulations. Moreover, the focus on cultivating new leadership promises a vibrant future for the industry. By harnessing the knowledge and connections gained at VCIA, risk professionals are well-equipped to navigate the complexities ahead and drive continued success in the world of captive insurance.
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.