Employee Benefits: A Major Growth Area for Captives

What are the main benefits of using a captive for employee benefits?

Wendy Liu: I believe employee benefits is an important growth area for captives. The benefits of writing employee benefits through the captive are fourfold. Firstly, it is about centralising control, with the captive able to provide a central view on benefit coverage and exposure globally. Secondly, there is the cost benefit. The captive allows for better management of costs and cashflow, as well as  potential for cost savings from global economies of scale. Thirdly, there is the benefit to offer additional coverage. Companies may find there are market standard exclusions in place and the captive could offer the opportunity to eliminate those exclusions and ultimately provide greater underwriting flexibility. And finally there is the issue of diversification. By adding employee benefits to a captive that is writing property casualty risks, it can mean a diversification of risk  which could reduce collateral requirement.

Is the prime driver for running employee benefits through a captive cost or control?

Wendy Liu: It very much depends on the company and the captive’s objectives. I have seen captives that are run as profit centres, and in this case, clearly cost efficiencies and savings will be a major driver. Other captives are used much more as a risk management tool, and here control is more important. For example, captive’s focus would be more as a tool for risk management determining areas where there is a high level of claims in one area, and implement measures to reduce the claims, such as wellness programmes.”

Is it possible to use a captive for employee benefits in the US?

Wendy Liu: There is an additional layer of approval required from the Department of Labor (DoL), to use a captives for employee benefits in the US.  It is perhaps more usage of captives for employee benefits in Europe as a result. There is still a high level of interest in the US nonetheless but it is a longer and more complicated process. There is certainly no reason why you cannot bring US and non-US benefit programmes into the same captive. We see examples of using either a US domiciled captive  or US branch of a non-US captive that meets the requirement of DOL to finance both US and non-US benefits.

Does this mean risk managers and human resources working together?

Wendy Liu: More and more risk managers are getting involved with employee benefits financing. Traditionally, risk managers and employee benefits managers have worked in silos, so initially there needs to be collaboration to establish a working model. But we are seeing thise model work better and better  for companies with clear separation of focus for risk managers and human resources on employee benefits .

How are the different responsibilities divide up?

Wendy Liu: Risk management would not usually get involved in benefit design. Human resources’ main focus is how to design the benefit to attract and retain talent, and that still stays with human resources. The collaboration works well when the two sides see where they add value, and where they contribute to the process and joint objective. In a successful collaboration, human resources will focus on benefit design strategy and the risk manager focuses on the benefit finance decisions. With better finance decisions, there are cost savings to be had that either frees up human resources’ time to focus on design strategy, or gives them more financial resource to implement more of the strategy that they want to put in place.

How does this collaboration work in practice?

Wendy Liu: Whichever model is used, it is all about bringing the two sides together. So it may be bringing human resources to be involved in the risk financing decisions, or even to be invited onto the board of the captive. Or it may be risk manager being in charge of insurance purchase decision, thus helping human resources find the best financing solution such as finding the best insurance provider leveraging their relationship and knowledge, leaving human resources more time to focus on strategy decisions and benefit design.

Zurich International Programs for Employees

Wendy Liu leads Zurich’s global team responsible for the enhancement and development of global employee benefits solutions, which has recently created a unique international programme allowing multinational corporations to manage centrally their global employee benefit arrangements and achieve more central control on employee benefits programmes and data globally.