Five years ago, Rolls Royce Canada Ltd. realized its insurer and one of its European divisions’ insurers had separate reinsurance through a larger multinational company, so it worked out a deal to pool both divisions’ insured benefits.
As a multinational company with more than 50,000 global employees, the automaker was an ideal candidate for a pooling arrangement, says Hosam Azara, its reward and pension manager for Canada. “[The reinsurer] was receiving a good volume of business from Rolls Royce from just these two regions together,” he says. “With this deal, we were able to reduce our premiums in Canada for some of the insured benefits without taking on any additional risk.”
Optimizing value
A captive arrangement — when an insurance company takes on the financing of the risks of its participants — is one pooling strategy that’s seeing renewed interest from global employers.
Read: Q&A with Rolls Royce Canada’s Hosam Azara
Captives can be an efficient way for these employers to retain risk, says Daniel Carter, senior vice-president and director of risk consulting at Aon. “Oftentimes, organizations will take significant amounts of risk that they just keep on their balance sheet, so captive arrangements allow them to establish a formal insurance organization, enabling them to focus on mending risk. It’s almost like creating a new market.”
The strategy isn’t widespread in Canada, but globally — and particularly in the U.S. — captives are becoming more important as the coronavirus pandemic is increasing cost challenges for plan sponsors. A 2021 captive management survey by Aon found 155 of 1,169 captives are underwriting some form of medical, health, life or disability program with total annual premiums reaching more than US$3.9 billion.
Employers seeing benefits costs increasing can get more scale using a captive arrangement, says Carter, noting the cost savings justify taking on the expense of forming their own insurance company. If an organization is going to pay astronomical premiums, captives allow it to capture that value and pay those premiums to itself, he adds.
By the numbers
13% —The increase in insurance entities under management in North America between 2018 and 2020.
73% —The increase in gross premiums underwritten by health-care captives since 2016.
93% — The percentage of health-care captive parent companies located in the U.S.
Source: Aon survey, 2021
Providing choice
Using captives, an employer can have pure and total creative control over their benefits and disability programs. “If the commercial market says it’s not going to cover COVID, then organizations can put that [liability] into a captive,” says Carter.
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In addition, the strategy gives organizations control over what risks they insure and which ones they don’t, says Joey Raheb, senior vice-president of health solutions at Aon. “For example, a company may have executives with high earnings and there may be limitations on their disability plan maximums. Captives allow organizations to choose what maximums they want to insure . . . or reinsure outside the captive. So they can cover an executive with a higher benefit amount and then decide if they want to retain all of that risk or cede some of it to a sub-sequent reinsurer or another pooling product.”
Although employers can put anything they choose in a captive, Raheb says benefits with more longevity or some degree of mortality and morbidity risk, such as life, disability and pensions, tend to be a better inclusion.
“The majority of organizations looking at including employee benefits in a captive are doing that in addition to a broader commercial risk or property and casualty retention of risk strategy. When you include benefits, such as life insurance and pensions, in a captive with property and casual, all these different risk factors support each other,” says Carter.
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“The trick is for organizations to stay ahead of trends,” he adds. “The risk to a captive is not managing it properly. . . . You have to stay on top of the actuarial and feather in changes to manage risk exposure to the captive’s financials.”
Lauren Bailey is an associate editor at Benefits Canada.