Employers Use Captive Insurance Arrangements to Improve Claim Data

The use of captive insurance companies for financing employee benefits continues to evolve as companies increasingly go beyond using their captive vehicles purely to save money on their annual employee benefit bill, Willis Towers Watson finds.

Research from Towers Watson last year showed that originally captive arrangements—in which a firm establishes its own insurance program—were used just for property/casualty insurance, but in the last 15 years, firms have been more aggressively looking at captives for health benefits and other employee offerings.

This year’s study shows the primary driver for nearly half (44%) of companies with employee benefits in their captive is to control and improve their claim data to help with ongoing cost management. This is up from one-quarter (24%) in last year’s study. Conversely, the study finds the percentage of companies that cited cost savings as the main driver dropped from two-thirds (67%) in 2015 to 44% in 2016.

More companies are using their captive as a strategic tool to manage risk and benefit costs proactively and to analyze claim data to identify and address key cost drivers. Many also look to employee benefits as a source of diversification to more traditional lines of risk typically included, such as property, casualty or business-related risks.

Willis Towers Watson polled more than half of the employee benefit captives operating globally as part of its specialist Captive User Group forum, held in London and New York in May and June, and found half (50%) of those questioned use their captive vehicle to provide death and disability benefits as well as health care or medical benefits.

Proactive risk management was also reflected in the influence employee benefit captives have over pricing, with half (50%) indicating that their captive has full determination or significant influence over pricing rather than relying purely on local insurers’ underwriting. Looking ahead, nearly half of the employee benefit captive users (47%) indicated that they are also considering a captive pension transaction, either in the next three to five years (41%) or within the next 12 months (6%).

“We continue to see a broadening use of employee benefit captives. Companies continue to explore further areas in which they can take on more of the risk and manage it internally in order to save money and mitigate risk,” says Mark Cook, director at Willis Towers Watson. “Also, many companies now recognize captives’ importance as a tool in benefit cost management, by identifying and addressing the key cost drivers. Successful employee benefit captives can stabilize and slow down benefit cost increases in an environment where medical costs continue to increase.”