French novelist, Victor Hugo, may well have been speaking of the self insurance of employee benefits (EB) when he said: “There is nothing more powerful than an idea whose time has come”.
The increased self insurance of EB programmes is not just a local phenomenon. Internationally, more and more companies are placing their employee benefit programmes into alternative risk transfer (ART) facilities like wholly-owned captives and rent-a-captives (as cell captives are known abroad).
Captives for benefits – How to use a captive to save money and enhance benefits coverage, a newly-released white paper prepared by international consulting firm, Spring Consulting Group reports that more than 5 000 captive insurers “already exist to aid their corporate parents’ bottom line”. While only a relatively small number of these have incorporated EB programmes into their captives, it is clear that this practice is becoming increasingly popular.
In the United States, the growth of employee benefits in ART facilities was slow for more than two decades. In 1974, as a result of widespread employee benefits plan abuses, The Employee Retirement Income Security Act (ERISA) established requirements for matters relating to minimum funding and vesting standards, required annual reporting and discussion, and established fiduciary conduct standards. The US Department of Labor’s ‘conservative’ approach to the self insurance of EB programmes (and the resulting onerous legislative requirements) was off-putting for many companies. But, since 2000, this has changed and, according to Spring Consulting, while “it has taken time for the rationale and benefits of placing ERISA benefits into captives to gain traction … the second decade of the 21st century will see many more large US companies deciding that the economic benefits of managing both their ERISA and non-ERISA benefit plans in their captives too compelling to ignore”.
One of the US Department of Labor’s requirements is that self insured benefits have to offer ‘enhanced benefits’ – essentially, this means more than what was previously offered. The department has effectively provided employers the space for innovation without being prescriptive. This, in turn, has allowed ART facilities to demonstrate just how effectively self insured EB programmes can be at providing not only more traditional benefits like medical, accident, disability, death and unemployment benefits and retirement plans; but also more ‘creative’ benefits like vacations, day care centres, scholarship funds and prepaid legal services. Even post retirement benefits – predominantly for medical care and pensions – are being effectively incorporated into ART facilities.
Probably the clearest indication of the Department of Labor’s vote of confidence for the use of ART facilities to self insure EB programmes is the introduction of the Prohibited Transaction Exemption (PTE) 96-62, known as EXPRO. The latter is basically a fast-track application process designed to save time, money and resources, which will undoubtedly appeal to many employers that were previously daunted by the prospect of meeting the onerous requirements necessary to secure approval for self-insuring their EB programmes.
As regulators increasingly acknowledge the concept’s validity, there is no doubt that the simple and undeniable fact that placing EB programmes into ART facilities results in better benefits for workers and savings for employers will continue to drive the trend towards self insurance of these programmes around the world.
Spring Consulting concludes that there is “significant growth potential” for placing EB programmes into ART facilities and that it is “a movement that cannot and should not be stopped. It certainly is not for every company, but for those that qualify, the significant and tangible benefits of doing so should not be ignored”.
The main benefits of self insuring EB programmes are risk portfolio diversification, the reduction of risk charges, investment return on reserves, reduction in expenses and underwriting savings. Next month this column will take a closer look at these benefits.
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