Tag Archives: captives

Captive insurance considerations for group life and long-term disability sponsors

Captive insurance can help employers reduce the costs of group term life or long-term disability (LTD) benefits. This arrangement provides employers with greater control over invested assets and possible tax savings. However, sponsors need to assess the underlying risks associated with these types of captives because they are different from the risks related to traditional captives in the property and casualty (P&C) sector.

In this issue of Benefits Perspectives, Milliman’s Paul Correia presents an overview of the evolving captive insurance market for large benefit plan sponsors. He also discusses significant risks that employers should think about regarding these funding arrangements. The following excerpt highlights some key risk considerations:

• Risk diversification—Employers with existing captive arrangements for P&C coverages may see opportunities for improving their enterprise risk management practices by adding group life and disability programs to the mix. Because P&C risks are often uncorrelated with group life and LTD risks, combining the different coverages under one roof may provide a better spread of risk. The resulting diversification may help mitigate risk by reducing volatility of claims experience. Similarly, an employer that does not have an existing captive and wants to establish one for employee benefits programs may also consider funding its P&C insurance through the captive, in order to diversify the captive’s risk attributes.

• Counterparty risk—Due to the nature of captive transactions that involve U.S. employee benefits, captives depend on the fronting companies to underwrite the risks and adjudicate the claims. The underwriting for group life and LTD insurance depends in large part on very company-specific perceptions of the underlying risks, such as LTD claim termination run-out patterns (i.e., whether benefits are paid for months or decades, depending on the cause of the disability) and group life mortality improvement. The adjudication of group life and LTD claims also tends to vary substantively from one company to another. The fronting company’s ability to effectively underwrite the risks and administer claims is an important risk consideration for employers that use captives to reinsure group life and LTD programs.

• Catastrophic risk—All insurance companies that provide group life and disability coverages are exposed to catastrophic risk. One random event, such as a plane crash, can cause extraordinary losses. This is a particularly important issue for group insurance writers due to the concentrations of risk by employer group and location. Catastrophic risk is a big concern, even for group insurers that have many group customers. It is an even greater concern to captive insurers that insure only one group. The impact of a catastrophic event can be reduced by entering into reinsurance and stop-loss agreements.

SCOTUS and captive insurance

Bill Thompson offers perspective on what the U.S. Supreme Court (SCOTUS) ruling on the Patient Protection and Affordable Care Act (PPACA) means for healthcare and employee benefit captives in this new article written for Captive.com. Here is an excerpt:

The SCOTUS ruling by itself has little direct effect on the administration of healthcare captives and employee benefits captives.   They should continue on the course they have been taking.   The change towards the integration/consolidation of healthcare delivery systems that is due to PPACA could impact the future professional liability exposure of healthcare captives.  The biggest force that may affect employee benefit captives is the potential for increases in the minimum stop-loss attachment point that is allowed; such a change will greatly reduce the growth in captive arrangements that pool the risks of multiple smaller employers that have self-insured stop-loss coverage.

The full article is available here.

Potential opportunities for captive insurers in HCR environment

The Patient Protection and Affordable Care Act (PPACA) is changing the landscape of U.S. healthcare and will create the need for new entities that can take on and manage financial risk. Captive insurers have experience in this area already, and may find that implementation of the PPACA and healthcare reform (HCR) brings them significant new opportunities. Dave Liner and Kathleen Ely examine this dynamic in a new paper.