Reinsuring Voluntary Benefits Can Provide Low Risk and High Reward
Traditionally, captive owners tend to think about life and disability when considering whether to reinsure employee benefits. Most captive owners typically do not consider reinsuring other voluntary employee benefits.
Voluntary benefits are 100% employee-paid and designed to provide financial security and help protect covered employees from large medical deductible, co-insurance, or legal expenses. The most common voluntary benefits are critical illness, hospital indemnity, accident, and legal Insurance, with others including electronic product warranties, group auto and home, and pet insurance.
Voluntary benefits typically have no chance for catastrophic losses, are very predictable, and have a short tail. Premiums average approximately $375 dollars a year and are paid directly through payroll deductions. Claims typically do not exceed a few thousand dollars and are paid directly to the policy holder.
So, why are there so few captives re-insuring employee benefits? The majority of captive owners find the complexities of securing an exemption from the Department of Labor (DOL) and the EXPRO (class exemption PTE 96-62) approval process difficult and arduous. In reality, the process is not nearly as challenging as feared and the advantages of placing voluntary benefits in the captive outweigh the perceived challenges associated with it.
In addition, many captive owners are concerned that they do not have the experience to underwrite and administer employee benefit programs. However, the DOL exemption process requires an A rated, or better, fronting carrier. As such, the fronting carrier and program manager provide the underwriting, enrollment, administration, and claims handling and the captive participates on a financial basis only.
Reinsuring voluntary benefits in your captive can provide substantial advantages in terms of financial and cultural returns:
- Employees: enhanced benefits selection, increased coverage or reduced premiums, and improved financial security.
- Human Resources: more control over voluntary benefit plan design and pricing, ability to provide leading edge benefits to attract and retain employees, and additional funding for new or existing employee programs.
- Risk Management/Captive: diversification, low risk/high predictability, use of existing capital, third-party premium, and increased return on investment.
- Finance: cash flow, profits, and potential tax benefits.
Virtually all of the design, servicing, and administration involved in running voluntary benefits through your captive can be handled using the BeneCap program provided through the Marsh & McLennan Agency. This innovative insurance solution may be the right fit to meet the unique needs of your organization.