Towers: Captive Insurance Helps Drive Down Benefit Costs

February 26, 2004 ( - Thirteen percent of companies polled are using captive insurance to cut down on employee benefits cost and 60% are considering captive involvement within the next five years.

The motivating factor behind the trend is cost savings and improved cash flow.   Of the 13% that currently have captive insurance programs in place – a program that uses a wholly owned insurance subsidiary that, like any insurer, provides underwriting and pricing, claims handling, accounting and administration – 33% report that the captive has achieved cost savings of more than 20%, according to a Towers Perrin survey.

As to how the cost savings are achieved, Towers Perrin consultant Sofia Tesfazion shed some light on the subject.   “Cost savings are achieved by reduction or elimination of external insurance company risk charges and brokers’ commissions, higher investment returns in certain cases and through economies of scale by group purchasing of administration or service,” Tesfazion said in a news release.   “Notably, employers that use captives to finance employee benefits enjoy greater control over these program costs and have direct access to all relevant financial information that can further enhance cost control.”

While costs savings and cash flow concerns were paramount among the deciding factors, the respondents to Towers’ survey also listed the ability to tailor benefit coverage and centralize coordination of benefit programs as one of the main driving forces behind looking into these programs.

Even though the percentage of companies currently using such a program may be small, Towers says recent rulings by the US Department of Labor (DoL) are easing restrictions on a company’s use of a captive for risk exposure to include employee benefit plans.   “Within the past year, two large employers petitioned the DoL for exemptions from prohibited transaction rules under ERISA. Those exemptions relate to using captives to provide group term life insurance and long-term disability benefits,” Tesfazion explained. “The DOL granted the exemptions, which in turn is spurring other companies to take advantage of the rulings in using their captives for employee benefits.”

More information about captive insurance programs is available by contacting Kathleen Carroll at (215) 246-4435.