How Captives Can Be Used in Multinational Employee Benefits Programs
Multinational organizations tend to negotiate and purchase employee life, medical, accident, and disability insurance programs in local insurance markets. The cumulative costs of such a decentralized approach can be significant, given the potentially poor visibility into expenditures.
Many multinationals with enough critical mass are consolidating contracts through multinational pooling networks to increase efficiency. But a growing number are further reducing costs by introducing a captive as reinsurer within pooling finance arrangements.
Captives are particularly effective for employee benefits programs because losses tend to be high frequency and low severity, which are less volatile than property and casualty losses and therefore easier to forecast. Though full risk transfer of employee benefits achieves budgetary certainty at a local level, it tends to be far less efficient at a group level for large multinationals.
By involving a captive in multinational benefit financing arrangements, it is possible to get the benefits of retaining risk and premium at a group level while maintaining a robust local administrative structure through a fronting company.
Potential advantages of using captives for employee benefits:
- Control over rates, terms, and conditions.
- Reduction of insurer profit and brokerage expenses.
- Flexibility of plan design and wording.
- Increase in frequency of reporting.
- Cash flow advantages as premium is paid at the beginning of the year, while claims are paid as they occur.
- Consistent governance across multiple geographies.
- Data warehousing and management with access to real-time financial data.
- Stability for the captive balance sheet and diversification for solvency requirements.
Defined Benefit Pension Financing
Although most defined benefit pension plans are closed, significant challenges remain in management of legacy obligations. A number of innovative transactions involving captives are proving to be beneficial for sponsors and trustees.
Pension captive transactions fall into two categories:
- A corporate sponsor seeks to gain control over assets and harmonize governance through a buy-in arrangement. Investment assets and management functions are then transferred to a captive via an insurance contract routed through a fronting insurer.
- To reduce costs and maximize flexibility, a captive is used as a synthetic fronting mechanism to access reinsurance markets directly.
Captives can help companies achieve several objectives related to their employee benefit programs. Marsh Captive Solutions expects that the number of captives writing employee benefits will continue to grow at a steady pace over the coming years.