Use of employee benefit insurance captives is on the rise as companies seek new ways to manage cost

The use of captive insurance companies to fund employee benefit insurance continues to evolve globally as organisations look for new ways to manage rising costs. Companies now increasingly go beyond using their captive vehicle purely to save money on their annual employee benefits bill. According to a study by Willis Towers Watson, the primary driver for nearly half (44%) of companies with employee benefits in their captive is to control and improve their claims data to help with ongoing cost management. This is up from a quarter (24%) in last year’s study. Conversely, the study finds that the proportion of companies for whom the main driver is cost savings dropped from three-quarters (67%) in 2015 to 44% in 2016.

Steve Clements, the Health & Benefits Leader at Willis Towers Watson Middle East said, “A captive insurer is an insurance company that is wholly owned and controlled by its insureds, in this context an employer that wishes to insure its employees; its primary purpose is to insure the risks of its owners, who can benefit from any of the captive insurer’s underwriting profits. On a global basis, there has been a clear evolution in the rationale for companies to include employee benefits in their captives. Historically it was often motivated by the desire to shave a significant sum off the ever increasing cost of providing employee benefits. Now we see more and more companies use their captive as a strategic tool to manage risk and benefit costs proactively and analyse claims data to identify and address key cost drivers. Many also look to employee benefits as a source of diversification to more traditional lines of risk typically included, such as property, casualty or business related risks.”

Willis Towers Watson polled over half* of the employee benefit captives operating globally as part of its specialist Captive User Group** forum, held in London and New York in May and June. The study found that half (50%) of those questioned use their captive vehicle to provide death and disability benefits as well as medical insurance.

The proactive risk management was also reflected in the influence employee benefit captives have over pricing, with half (50%) indicating that their captive had full determination or significant influence over pricing rather than relying purely on local insurers’ underwriting. In the future, nearly half of the employee benefit captive users (47%) indicated they are also considering a captive pension transaction, either in the next 3-5 years (41%) or within the next 12 months (6%).

Steve Clements continued, “Internationally, we continue to see a broadening use of benefit captives and companies explore further areas in which they can take on more of the risk and manage it internally in order to save money and mitigate risk. Many have noted captives’ importance as a tool in benefit cost management and successful benefit captives are often able to stabilise and slow down the increase in benefits costs in an environment where medical costs continue to increase by identifying and addressing the key cost drivers. Whenever an employer is planning to use a captive they have to ensure that it is structured in a way that is compliant with the local regulations of each country in which it will operate. This is particularly important in regions like the Middle East where there are specific rules relating to the provision of mandatory health insurance in countries like UAE and Saudi Arabia.

“Our own Global Medical Trends report from earlier in the year shows that the average health insurance premium in the Middle East increased at a higher rate than the global results which were 7.5% in 2014, 8% in 2015 and is estimated to be over 9% this year. The savings available to companies who run a successful benefits captive can be significant so as companies in the region look towards alternative solutions to mitigate rising insured employee benefit costs, exploring the feasibility of using a captive could be worthwhile.”