Magazine article Risk Management

Captive Benefits Programs

Magazine article Risk Management

Captive Benefits Programs

Article excerpt

risk response

What would it take-in terms of the number of employees or the magnitude of the benefits program-in order to make a captive or renta-captive program more advantageous than conventional insurance programs, which would appear to have very thin margins?

Dan Barlow

Corporate Manager/Risk Management

Barnes Group Inc.

Bristol, Connecticut

(See "Writing Employee Benefits in a Captive," RM, August 2001.)

The answer to the question depends on the motives of the employer. If the organization is driven by the need to reduce current cash outflow for premium and program expenses, employee benefits premiums will need to be more than $1 million (assuming the captive insures no other types of risk) to support the fixed costs of forming and operating the captive. The larger the amount of the premium, the greater the ability of the employer to negotiate program structure and pricing with a fronting carrier.

If the employer is seeking to introduce unrelated (nonshareholder) risk, such as a group life or long term disability (LTD) policy, into an existing captive program, a pool of risks large enough to produce premiums equal to 30 percent or more of the total captive premium is required. This is not to satisfy Department of Labor requirements, but to produce unrelated risk in a captive that does not have a significant amount of premium from affiliates to satisfy Internal Revenue Service requirements for risk pooling and distribution in the captive. Additionally, only those employers with significant employee benefits costs will be able to justify the time and expense of seeking DOL approval to reinsure ERISA risks into their captive.

However, if the motivation for an employer is to achieve long-term stability and rationality in the pricing of its employee benefits programs, rather than an immediate reduction in price, an organization in the $1 million annual premium range is a viable candidate for a sponsored captive program. Given that the employer uses its captive cell as the vehicle for financing its retained risk, the only size criteria is the financial strength to retain at least the first $250,000 of risk, per claim.

The ultimate objective of a captive program remains reducing cash outflow. If a sponsored captive's selfinsured reimbursement policy is used in conjunction with an administrative services only (ASO) agreement, the overhead costs for participation in a sponsored captive should be lower than the expense loads that are factored into a commercial insurance premium. …

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