Using captives in multinational employee benefits programmes

Employee benefits are an important part of any global corporation’s risk and insurance spend. While many benefits are localised in nature, there are real advantages to managing them on a global level when possible. Matthias Helmbold, head of technical and services at MAXIS Global Benefits Network, and Matthew Latham, head of global programmes and captives at AXA XL, explain the latest trends in employee benefits and how underwriting employee benefits in a captive can bring greater transparency and diversification.

What are some of the major trends in employee benefits currently?

Matthias Helmbold: Increasing numbers of clients are looking to reinsure employee benefits risks within a captive; the number of employee benefits captives has roughly doubled in recent years.

Another trend, following the enormous effort that many corporations have made to convert their defined benefit pension plans to defined contribution plans, is that most benefits are now a multiple of salary. That means that costs are linked to salaries and, therefore, can be contained to some extent.

A major exception to this, however, is medical benefits – and here costs have been rising. About two thirds of spend on insured employee benefits for most multinational corporations is now on medical. We are seeing clients doing a lot of work to better understand and manage these costs. For example, a greater investment in employee health and wellness is not only a good thing to do; it can help companies get a better handle on medical costs.

A captive offers a transparent way for companies to understand their data and gain insights into the performance of employee benefits programmes globally. Reinsuring these benefits in a captive gives clients a greater degree of control over the programmes and enable changes in terms and conditions to be implemented more easily and in a globally aligned way.

How are technology and innovation changing the provision of employee benefits?

Matthias Helmbold: There is a definite drive towards more flexible employee benefits offerings. For example, companies are using platforms to offer a menu of benefits from which employees can choose – or choose to top up. Employee benefits tend to be quite local; what is required or desirable tends to differ from country to country.

Technology is key here to manage costs on a global basis. In years past, providing a great deal of flexibility for benefits would have been too expensive for many employers, but technology is making the customisation of programmes much simpler and more cost-effective.

Are there new benefits that employers are looking to provide and employees are seeking to have covered?

Matthias Helmbold: During the past few years, critical illness is a coverage that is increasingly being provided – either as part of a life policy or as an additional benefit. For some companies, the extension of benefits to same-sex beneficiaries has become increasingly important.

There is also a greater awareness of mental health issues and employers are looking to ensure that these are better understood and managed.

There is also a move to cover gender-transformation surgeries, for example. A captive is well placed to drive some of these changes and include terms and conditions that might not be part of local insurance market practices, or for which there might not be an ‘off-the-shelf’ provider. Of course, local legal compliance is important here, but captives can offer a great way for companies to expand benefits that their employees are asking for.

Are you seeing more interest in writing employee benefits alongside P&C risks in a captive? What are the benefits for clients of this approach?

Matthew Latham: We are definitely seeing increased interest from clients in putting employee benefits risks into captives that until now have been focused on property and casualty risks.

There are several advantages for including employee benefits in captives alongside P&C risks. Firstly, diversification. Employee benefits risks tend to have a higher volume of losses but they are more predictable. Whereas for P&C risks – notably in property or energy lines – the loss profile is more low frequency but high severity. This is significant because capital models reward a blend of different risks with capital savings.

Secondly, the correlation between employee benefits risks and P&C risks tends to be low. Therefore, if one area of the captive suffers a loss then it does not increase the probability of a loss elsewhere in the captive. So, a poor performance in one line of business could be offset by good performance in other lines, which will give greater stability to the financial performance of the captive overall.

There are also economies of scale to be derived from increasing the number of business lines written in a captive. Employee benefits risks typically bring significant premium volume – this can help pay for the services all captives need to employ, regardless of how many lines they underwrite, such as financial reporting, compliance and governance. This reduces expenses as a proportion of the premium written, making the captive more efficient to run.

These are all good reasons for clients to consider putting employee benefits into P&C captives, and we are seeing increasing numbers of clients exploring this option.

Contributed by Matthias Helmbold, head of technical and services at MAXIS Global Benefits Network, and Matthew Latham, head of global programmes and captives at AXA XL