In theory, employers offering group risk should enjoy many of the advantages of self-insuring through a captive arrangement that has traditionally benefited property and casualty insurers.
Setting up a wholly-owned insurance company, typically in a tax haven, can smooth risk and contain costs by removing external markets – incorporating a stop- loss to protect against the largest risks, if required.
The structure also enables companies to leverage on management information data to provide good visibility of long-term claims patterns, achieve sustainable pricing and support ESG commitments and evidence-based wellbeing strategies.
So, the fact that there are understood to be only around 135 captives worldwide that include group risk may seem to reflect a market a tad undertapped. It equates to only around one fiftieth of all captives and is dwarfed by over 2,000 group risk multinational pooling programmes.
But it still greatly exceeds the usage of captives for pensions and for non-US medical risks, and should be seen in the context of an approach that is still relatively new. It has only gained any traction in the last 15 years and – unlike the pooling arrangements – has only been viewed as feasible for companies with annual benefit spend of at least £5m to £10m.
Aon Global Benefits global leader, captive employee benefit services Sven Roelandt says: “There is absolutely a trend towards group risk in captives, mainly putting it into existing captives. We’ve even had a couple of clients recently creating captives specifically for group risk.
“In the last three years group risk captive numbers have doubled, and I see them now doubling every couple of years going forwards.”
Allianz Global Benefits regional director Giovanni di Meo estimates that in the last four years over 50 per cent of new multinational group risk business has spawned from captive solutions.
Drivers and drawbacks
A desire for diversification from the captives themselves to combat a hardening property and casualty market has contributed to the impetus, as has the recent pandemic by instigating a trend towards global underwriting generally and closer relationships between internal departments.
Zurich director of customer and distribution management, UK & APAC Chris Mason says: “HR and procurement have been in control of arranging employee benefits and have been completely separate from the non-life placement of insurance, but this arrangement is changing. We’ve seen a natural evolution towards insurance and risk for an organisation being placed together and a more holistic view being taken.”
Also highly relevant, is an appreciation of the ability of captives to include covers often excluded by insured group risk schemes, such as treatment for gender dysphoria and alcohol and drug abuse.
Mark Cook, global leader of employee benefits and captives at Willis Towers Watson, emphasises that during the last five years human considerations have become just as important drivers as the ability for companies to smooth costs and risks and to produce an operating model delivering a consistent approach.
He says: “What is topical is that every company wants to be seen doing something around diversity, equity and inclusion, and owning the risk enables you to add in non-standard benefits.”
Factors potentially limiting the appeal of captives, however, include the fact that, in the UK in particular, the group risk market is highly competitive and has very high free cover limits and valuable embedded additional services – which can cost more to arrange via a captive. Multinational pooling networks also provide an attractive alternative for many companies.
Towergate Health & Protection CEO Iain Laws says: “Significant costs with establishing a captive, together with running costs around governance and compliance and the need for expertise, can easily eat through any underwriting gain made. So, the total coverage around the world may not be sufficient to justify a captive, whereas using a pooling network can avoid significant setup costs.”
A question of size
For the biggest companies these potential downsides show no signs of interrupting the current momentum in the direction of captives.
MAXIS Global Benefits Network head of business development Paul Lewis says: “We consider a captive to be the most efficient and effective way for the most centralised multinationals to manage and finance their employee benefits, and only see usage growing.”
Nevertheless, the extent to which medium-sized and smaller companies are likely to use the approach is less certain.
Spring Consulting Group vice- president Prabal Lakhanpal says: “In five to ten years from now I think small and medium-sized employers will gravitate towards captives. I’ve seen companies with premiums of as little as US$300,000 using captives for property and casualty, and employee benefits could follow this trend. I’ve already been approached by companies with around 25 employees looking to fund a medical stop-loss for a captive.”
Zurich emphasises that small-to-mid-sized companies are now able to benefit from innovative captive arrangements through structured products, but Legal and General isn’t seeing any trend towards SMEs using captives.
Aon’s Sven Roelandt doesn’t see captives for group risk becoming viable in the near future for companies with benefit spend of less than €5m. He does, however, predict that in five years’ time total premium for group risk captives will rival that of group risk in multinational pooling arrangements.
How big is the captive market
Captives give companies far greater control over their risks and data, so the nature of the beast dictates that there are no credible reports detailing industrywide figures on employee benefit inclusion.
But there is probably no-one better placed to shed some light on the subject than Willis Tower’s Watson’s Mark Cook, who was part of the team that in 1996 launched the first two captives to include employee benefits.
He estimates there are around 7,000 captives altogether worldwide with large corporates, but that only around 135 of them contain group risk benefits. A proportion of these 135 also include non-US medical risks.
He thinks it’s likely there are several hundred other captives that include US medical risks – many being arranged on an industry-owned basis as opposed to being corporate owned.
Most of the 7,000 captives host property and casualty risks, with the remainder catering for everything from general liability, motor, workers’ compensation and credit risk to card risk, cyber risk and marine risk.
Cook feels there are still only around a couple of dozen captives being used for pensions – a practice that only started about a decade ago – and that these are related to defined benefit retirement plans and associated risks in Europe.
Outsourced expertise
An increasing ability to utilise external third parties with relevant expertise is making the captive approach much more feasible for employee benefits.
Insurers like Zurich, Generali and Legal & General can feed back data on claims and interventions to the captive, where it is interpreted by actuarial and financial experts.
Additionally, specialist intermediaries are now increasingly offering ongoing consultancy support in addition to giving advice at outset on whether a captive might be the most appropriate solution.
Some are providing underwriting recommendations and advice on how to place digital health solutions within a captive.
Aon Global Benefits’ Sven Roelandt says: “One of the things that held back the captive solution was that companies thought they needed significant in-house resources to run programmes, but now it’s much easier to outsource. There has become a greater availability of consulting from specialist intermediaries to manage employee benefit captives in the last two or three years.”