“If you look at some of the biggest players—oil and gas, or energy—the business model is focused on assuming risk,” notes Gerry Winters, senior international consultant at Towers Watson.
Rising health care costs are an unmistakable pattern, Winters says, which have emerged as a significant risk, especially in the last seven to eight years. One way to rein in long-term costs is by assuming the insurance risk by setting up an in-house insurance program, called a captive arrangement.
Originally the arrangement—in which a firm establishes its own insurance program—was just for property/casualty insurance, but in the last 15 years, firms have been more aggressively looking at captives for health benefits.
For these large firms, Winters says, the leap is an obvious one. From their own risk-taking business model, it’s a logical step to assume the health insurance risk as well. While a number of firms are reluctant—“We’re not an insurance company,” some say—when they look at the numbers in managing long-term costs and getting better control over their programs, it becomes a more realistic option. It is self-insuring for multinationals, Winters says. Several thousand captives exist already designed to cover P&C risk, with a definite rise in the use of employee benefit captives: about four or five new captives a year.
According to a white paper from Towers Watson about benefits options, captive insurance arrangements are most effective when companies have significant experience applying risk management principles to employee benefits. “Captive arrangements returned average surpluses of 5.1%, while the median captive return was significantly higher at 11.3%,” the paper notes. “The difference between the median and mean is largely attributable to the experience of one company with significant losses. When that captive is excluded, the mean and median returns are very similar, and both are higher than the results achieved under pooling.”
The “Towers Watson Multinational Pooling and Benefit Captives Research Report 2014” concentrates on the supply side, thoroughly examining two of the most popular benefit financing strategies. The study, one of the largest of its kind, explores the way companies use multinational pooling and captive arrangements to their advantage and answers many of the questions commonly asked by global benefit leaders about these approaches.
On the supply side, Winters explains, a plan sponsor can drive down long-term costs by stripping out the network risk retention charged by an insurer. “You’re doing your own risk retention,” he tells PLANSPONSOR. “You’re not setting a profit charge as a provider—the profit stays with you.”
Another savings comes from cutting down on provider costs. Even if the plan still uses a broker, the captive arrangement means eliminating the cost of negotiating rates and a broker’s commission, Winters says. “Sometimes the roles are cut down and they just focus on the administration of the plan.”
Perhaps less quantifiable but just as vital: captive arrangements can provide greater access to information about health care claims. Plan sponsors receive monthly or quarterly reports about their medical claims, Winters says, to help them decide if any company actions have an impact on premiums. One way to mine claims for usable data is by examining specific diseases. Winters says that one firm, with operations in the Philippines, was able to see an unusually high number of gastrointestinal claims from its overseas workforce. The solution turned out to be more frequent restroom breaks for the staff.
Turning to a captive can be a daunting task, Winters says. “With pooling, you’re starting to move the business slowly into one global network of insurers,” he explains. A captive arrangement means the company is now taking on more risk and becoming the insurance company, and funding the captive itself. “But in the process, the company can dump a lot of expenses, and the arrangement will likely continue to grow.”
The trend may even move down-market, Winters believes. “It won’t be for really small players, but for firms with eligible premiums greater than $10 million annually, it can be an attractive option,” he says. "Medical trends around the world are still close to 10%. U.S. leaders are noticing, and we hear more stories of chief financial officers asking, ‘What are we going to do about this?’ ”
The paper examines:
- How effective are multinational pools and/or captives in mitigating employee benefit program costs?
- Which countries and contracts are best and worst for pooling or reinsuring to a captive?
- What type of risk mechanism is likely to be best for a company’s multinational pool, and how do different risk mechanisms compare?
- What are the most successful companies doing to ensure their multinational pooling or captive strategies are effective?
Towers Watson collected and analyzed pooling and captive annual reports for 2011 to 2013 and portions of 2010. The study incorporates all participating benefit plans, including life, accident, disability, medical and some retirement plans (e.g., risk-related elements such as spouse or orphan benefits). Nearly 800 annual reports were submitted by 163 multinational companies, covering $3.1 billion in premiums across 93 countries. The report is available on Towers Watson' website.