Utilizing a Captive for Employee Benefits: FAQs

The following article provides answers to common questions employers face when considering a captive to support their global benefits strategy.

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June 12, 2024

Multinational employers are increasingly focused on building global consistency as part of their overall benefits strategy. To realize this goal, employers are considering captives, so it’s not surprising that questions about them are on the rise. These FAQs provide answers to common questions employers face when considering a captive to support their global benefits strategy.

1. What is a captive and how does it work?

A captive is an insurance company formed and funded by the employer to insure risks that might otherwise require a third-party insurance contract. While captives can be deployed for a variety of risk management areas, this discussion will focus on international employee benefits (i.e., health care/medical programs, life insurance, accident and disability plans). This arrangement operates through international reinsurance agreements between the captive and fronting insurer network(s), which then have reinsurance contracts and partner with local insurers and business entities to provide benefits to employees (see Figure 1 below).

Figure 1: How Captive Arrangements Work

 

Source: Business Group on Health. Leveraging a Captive to Accelerate Your Global Benefits Strategy. February 26, 2024. https://www.businessgrouphealth.org/-/media/bgh/webinars/webinar-slide-pdfs/captives-webinar-slides.pdf. Accessed May 29, 2024.


2. Traditionally, what are the advantages of using a captive strategy for employee benefits?

A captive strategy offers multinational employers a variety of advantages in support of their global benefits strategy. Listed below are some of the top traditional advantages that help employers avoid price fluctuations year over year at the local level, support cost management efforts and enable a pragmatic approach to plan pricing over the long term.

  • Cost savings: Reduce or eliminate annual profit margins associated with external/local insurers and pooling risks. If the captive generates savings or excess funds through efficient risk management, those savings go back into the captive and can be reinvested to fund other employer-sponsored initiatives.
  • Tax optimization: Opportunities for tax efficiency and improved cash flow management.
  • Global governance/control: Enhanced centralized oversight and consistency in benefits across countries and regions.
  • Risk management: The processes inherent to managing a captive can help facilitate more effective management of risk through proactively tailoring insurance solutions and strategic planning.

3. What is driving more recent interest in captives, especially since employers have known about them for a while?

Beyond the traditional advantages of captives, some of the more novel advantages that have emerged over the last 5 years include the ability to further global consistency efforts and increased flexibility. A captive enables alignment with global minimum standards among health care programs, including by addressing challenges often encountered managing benefits in countries with a small number of employees. In addition, a captive allows for increased plan design flexibility and thus a greater ability to tailor benefit offerings to suit diverse workforce needs, preferences and local regulations. Further, having a captive arrangement encourages innovative approaches to employee benefits design and delivery, particularly as it pertains to programs that support diversity, equity, inclusion and belonging (DEIB) initiatives.

4. What are some common challenges to be aware of when considering a captive?

Implementing a captive comes with its own set of challenges. Some of the common ones to keep in mind include:

  • Lack of organizational alignment: Proactive communications between internal company stakeholders are critical to successful implementation and long-term captive management. In addition, many organizations utilize a captive strategy for a range of risks, including property/casualty risk. Varied objectives for different areas of risk can contribute to organizational misalignment.
  • Vendor partnership management: Establishing and maintaining relationships with local partners, including brokers, fronting networks, local insurers and relevant service providers/business entities, is crucial for the success of captives for international employee benefit programs. Effective collaboration and communication with external partners are also essential to ensure smooth implementation and operations.
  • Diverse workforce needs: Managing employee benefits across different countries involves dealing with diverse cultures, languages and customs, preferences and expectations. Effective communication and understanding of local preferences and cultural norms are essential to ensure the success of employee benefit programs.
  • Near-term cost volatility: While a captive model should deliver savings over an extended time period, the captive must self-fund costs in the near term, which can create unpredictability in month-to-month costs. Employers must ensure that the reinsurance treaty within their captive model provides adequate protection against such volatility.
  • Regulatory complexity: Operating across multiple jurisdictions means dealing with diverse regulatory environments. Employers must thoughtfully navigate complex insurance systems and tax regulations in each country where they operate to ensure local compliance. The use of an experienced captive broker and fronting network is critical for addressing this challenge.

5. What criteria are used for determining whether to utilize a captive and/or what benefits/policies to include?

While large multinational employers may be better suited to form a captive than smaller organizations, it is less about the size of the company and more about the amount of the premiums and the type of insured products and risk amount. For employers exploring a captive, to reap the greatest rewards from this approach, it is recommended that they have a diversified portfolio with at least $5-$10 million in current premiums. The process a company uses to decide which policies should be in a captive will vary according to each employer’s geographic presence, demographic needs and/or strategic goals, but generally conducting an initial feasibility study can help inform employers in making these determinations.

6. How long does it take to set up a captive arrangement and what is the implementation timeframe?

Setting up a captive arrangement generally takes as little as a few months or up to 1 year. There are several components in the initial setup, including conducting a feasibility study, engaging a broker/advisor to assist with the process, completing requests for proposal (RFPs), internal approval and communications. However, developing a roadmap for implementation is a longer, multiyear process that can vary depending on an employer’s strategic priorities and approach. It behooves employers to keep in mind that this journey is ultimately a marathon, not a sprint.

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