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Employee Benefit Captives – The BasicsTuesday, October 2, 2012, 10:15-11:30 am
Speakers
• Brady Young, Strategic Risk Solutions
• Greg Arms, Mercer Marsh Benefits
• Andrew Cavenagh, Pareto Captive Services
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Agenda
• Major Types of Benefit Captives– “Fortune 500” Benefit Captives– Multi-National Benefit Captives– Group Captives for Small to
Medium Sized Employers• Questions & Answers
Regulatory Matrix• States regulate:
– Fully-insured programs (e.g. Blue Cross)– Stop loss policies – MEWAs
• ERISA regulates:– Self-funded programs
• Domicile regulates:– Captives– RRGs
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Fortune 500 Benefits Captives
Background: Decision Process
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Background: Two Approaches
Background: ERISA vs. Non-ERISA
ERISA Non-ERISA
Life Medical Stop‐Loss
AD&D Deferred Compensation
Long-Term Disability Top-Hat Compensation
Short-Term Disability Company Owned Life
Health-Drugs/Other Personal Accident
Dental
Vision
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Medical Stop-Loss
Background: ERISA
• ERISA authorizes the U.S. Department of Labor (“DOL”) to grant two types of exemptions from the prohibited transaction rules: – class exemption that may be relied upon by any employer meeting the conditions in the class exemption
– individual exemption that can be relied upon by only the employer that applied for the individual exemption
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Background: Regulatory History
• The DOL had granted a class exemption allowing an employer to use its captive to insure or reinsure employee benefits plans if the captive derives no more than 50% of its annual premiums from related business
• The Columbia Energy ruling PTE 2000‐48 was a landmark individual exemption ruling that allowed an employer to use a captive for employee benefits with less than 50% unrelated risk
Background: Regulatory History
• Archer Daniels Midland (“ADM”) PTE 2003‐07 followed the Columbia Energy path to gain an individual exemption allowing for life insurance benefits in a Vermont Captive
• The significance of the ADM ruling was the triggering of “EXPRO” or expedited processing of the request leading to approval in 75‐90 days
• All subsequent approvals have followed the EXPRO
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Background: EXPRO Timetable
Submit application to Department of Labor on
EXPRO format basis
Department of Labor acknowledges receipt of
application
Period of "Tentative Authorization" -45 days to
elapse
After "Tentative Authorization" period expires, Notice of
Distribution can commence is sent by first class mail is
deemed to be completed 3 days after started
25 day Comment Period after completion of Notice of
Distribution
Final Authorization - expiration of 5 day waiting period after lapsing of Comment Period
Captive can commence underwriting ERISA governed
reinsurance coverageTotal time = 75-90 days
Background: EXPRO Approvals
Parent Approval Date Coverage Line
Columbia Energy 10/2000 LTD
ADM 5/2003 Life Insurance
International Paper 11/2003 Life Insurance
SCA 7/2004 LTD, Life, A&D
Alcon Laboratories 8/2004 LTD, Life
Alcoa 1/2005 Life Insurance
Sun Microsytems 10/2005 Life Insurance
Astra Zeneca 1/2006 LTD, AD&D
AGL Resources 5/2006 LTD, AD&D
H. J. Heinz 9/2006 and 5/2008 Life, LTD, AD&D
Wells Fargo 1/2007 LTD, Life Insurance
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Background: EXPRO Approvals
Parent Approval Date Coverage Line
NiSource 3/2007 Life Insurance
Cephalon 5/2008 LTD, Life, AD&D
YKK 6/2008 Basic Life and LTD
United Technologies 12/2008 LTD
Deutsche Post/DHL 12/2008 LTD
ConAgra 10/2008 Life, AD&D
Sloan-Kettering 3/2009 LTD, Life
Banner Health 7/2009 Life
Dow Corning 10/2009 LTD, Life
Microsoft 11/2009 LTD
BB&T 10/2010 LTD, Life, AD&D
Coca-Cola 2010-11 Retiree Health
Deutsche Bank 8/2011 LTD
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Economic Aspects/Risk Profile
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Sample Structure
• The structures developed to date exhibit the need for partnership and risk sharing between the captive and the fronting carrier
• Deal components include:– Quota Share Loss Agreement– Sunset Clause in Long‐Term Disability Claims
• To avoid 20+ year payout
– Funds Withheld vs. Transferred Approach• Captive receives guaranteed investment return in funds withheld structure
Sample Structure
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Sample Structure
Carrier 50% quota share to 125% expected
Captive 50% quota share to 125% expected
AggStop
Case Study: Large US Corporate
• Originally purchased guaranteed cost• Placed LTD in their captive after feasibility review• LTD performance had never been measured and managed
• Transfer to captive increased transparency, measurement and management of risk
• Witnessed direct correlation to managing STD and its benefit on LTD
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Case Study: LTD Premium Rate
1.7671.707
1.3881.275
1.1550.955 0.955
Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 Period 7
LTD Rate
Case Study: LTD Risk Profile
Layers Frequency Cumulative %25,000 197 54.12%50,000 72 73.90%
100,000 44 85.99%250,000 38 96.43%500,000 6 98.08%
More 7 100.00%Total 364
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Case Study: Life Risk Profile
Layers Frequency Cumulative %25,000 313 59.96%50,000 58 71.07%
100,000 64 83.33%250,000 60 94.83%500,000 22 99.04%
More 5 100.00%Total 522
Case Study: AD&D Risk Profile
Layers Frequency Cumulative %25,000 13 43.33%50,000 7 66.67%100,000 5 83.33%250,000 3 93.33%500,000 1 96.67%
More 1 100.00%Total 30
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Benefit Captive Considerations
Benefit Captive Considerations
• Cost Savings/Stability– Retain more risk– Reduce risk charges– Lower fixed costs– Retain investment income
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Benefit Captive Considerations
• Control– Gain greater understanding of risk– Increase management and measurement of risk– Improved coordination with Integrated Disability Management (“IDM”)
– Expand use of existing captive surplus– Moderating current captive claims volatility through addition of uncorrelated risk
Captive Prospect/Coverage Profile
• At least 3,000 employees• A sizeable benefit program of $1,000,000 or more annually
• Purchases “guaranteed cost” insurance • These are rules of thumb and there are exceptions to all of these suggested targets
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Summary
• Companies that have implemented benefits in captives have found:– Current benefit procurement process can be inefficient– Program experience is not being measured and monitored– Claims are being mishandled e.g. placed in disability instead of workers compensation
– Focus on benefit programs is positive, with or without the implementation of a captive and results in direct savings on benefit programs
Multi-National Benefits Captives
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Multinational Pooling Historical Overview
1953
2012
The industry’s first multinational benefits pool by AIG for Chase Manhattan covering three countries for $17k group life / medical premiums. The pool has since grown both geographically and financially over the years
1,500 companies have over 3,000 pools with a global premium of around $6 billion and an estimated 20 million covered lives
There are now 8 pooling networks active in 170 countriesversus 11 networks just several years ago
1962Swiss Life created the first pool in a tariff based country that included pensions. Today, the Swiss Life Network is a leading international network of more than 60 local insurers
Multinational Pooling Spectrum of Risk
Where are you now?Low Risk Increased Risk
LocalMarket
NaturalPool
TraditionalPooling
ActiveManagement
Reinsureto Captives
Directto Captives
Increased cash flow and potential for
cost savings
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• How many international benefits captive clients do you have?
Pooling Networks In‐Force Captives
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28
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1
0
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1
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Benefits Captives / Multinational PoolingPulse Survey September 2011
60+captives
with benefits
• Where do you see new product innovation and new services being added to the multinational pooling spectrum of solutions?
“We see some room for product innovation in the alternative solutions space, in particular for
global underwriting programs.”
“Some pools will be established for information purposes only and clients
will be willing to pay a fee for this information monitoring service.”
“Increasing demand towards utilization and trends reports on the
health business.”
“Global service standards – real time access.”
“More on-line services and reporting through web based client lock-boxes.”
“Corporate wellness solutions with group medical insurance are actively promoted.”
Benefits Captives / Multinational PoolingPulse Survey September 2011
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Benefits Captives Structure
ReinsuranceProtection
Captive NetworkInsurer
Local NetworkProvider
Local NetworkProvider
Local NetworkProvider
Local NetworkProvider
LocalCompany
LocalCompany
LocalCompany
LocalCompany
Independent Local Providers
LocalCompany
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Required to Leapfrog Market
PracticeActions to Meet Market Practice
Mature Market NormsCurrent State
Organization ABC
• Fully Insured or Self Insured
• Deductibles
• Co-Pays
• Claims Paid as Reimbursements
• Stand Alone In-House Medical Clinics
• Coordinated Care
• Plan Design Incentives
• Preferred Provider Networks
• Benchmarking
• Employee Communications
• Behavioral Change
• Focus on Chronic Conditions
• Improve Access to Care
• Wellness
• Employee Health Management
• EAPs
• Integrated Medical Clinics
• Data Analytics
• Captives
E7 Countries and BRICSEmerging Markets: Paradigm Shift on Healthcare?
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Benefits Captives for Small and Medium Sized Employers
Employee Benefit Group Captives• Built on a self‐funded platform• Typically designed for small to medium employers (25 to 500 employees)
• Medical and pharmacy most common lines• Typically doesn’t required DOL approval• Approximately 50 programs in existence• Growing rapidly
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Average Annual Health Insurance Premiums and Worker Contributions for Family Coverage, 2005-
2010
$8,167$9,773
$2,713
$3,997
2005 2010
Worker Contribution
Employer Contribution
$10,880
$13,770
47%
20%
27%
Motivations
• Control• Reduce costs• Receive data• Reduce or manage risk
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What’s Driving Costs?• CDC estimates that 70% of costs are driven by:
– Stroke– Heart disease– Cancer– Diabetes– COPD
• These items can be controlled through exercise, diet, and treatments
• Employers’ views are moving past the next 12 months
Three Major Structures
• Almost all are actually stop loss captives not “employee benefit captives”
• Captive Direct• Risk Retention Group• Fronted Captive
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Group Captive ‐ Overview
Captive Direct• Structure:
– Captive issues stop loss policy directly to employer/owner– Captive purchases “reinsurance” to help protect against large
claims• Pros:
– Low frictional costs– Very flexible
• Cons:– Limited capital– Not approved to write business in any state but state of domicile– No waiver on securities issues
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Risk Retention Group (RRG)• Structure:
– RRG issues stop loss policy directly to employer/owner– RRG purchases “reinsurance” to help protect against large claims
• Pros:– Low frictional costs– Very flexible– Waiver on federal securities issues– Permitted to write business in all states
• Cons:– Limited capital– Non-domiciliary states not always cooperative
Fronted Captive• Structure:
– Admitted carrier issues stop loss policy to employer/owner– Admitted carrier reinsures portion of risk to captive
• Pros:– Rated balance sheet– Approved in all states where admitted carrier is approved
• Cons:– No waiver on securities issues– Cost of rated balance sheet of admitted carrier
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Contracts
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Predictions• Exponential growth• This isn’t a passing fancy• Stop loss carriers supporting will grow• Employers are increasingly realizing:
– The only way to reduce costs is to reduce claims
Questions & Answers
