Aon’s Aidan Kelly and Hylant’s Anne Marie Towle discuss workers’ compensation captive programmes and the challenges they are facing
Workers’ compensation underwriting performance is expected to remain strong in 2021 with favourable results driven by recent reductions in claims frequency and further recognition of material reserve redundancies, according to Fitch Ratings. Workers’ compensation programmes in the US are state regulated, with laws determined by each state legislative body and implemented by a state agency. The programmes provide the payment of lost wages, medical treatment and rehabilitation services to workers suffering from occupational injury or disease. According to the US Social Security Administration, the workers’ compensation system in the US developed from principles enacted in Europe in the late 1800s.
Following public pressure, the US Congress was prompted to pass the Employers’ Liability Acts of 1906 and 1908, which worked to soften the defense of contributory negligence.
During the early 1900s the federal government considered social insurance and welfare to be the purview of the individual states and there was no discussion of a federal occupational injury or disease programme other than the one created in 1908 to cover federal workers.
This meant that each US state passed its own workers’ compensation legislation, with the first comprehensive workers’ compensation law adopted in Wisconsin in 1911, and nine other states passed regulations that year. Some 36 more states followed before the close of the decade.
The last holdout was Mississippi, which finally passed workers’ compensation guidelines in 1948.
“Many organisations utilise a captive programme to fund their workers’ compensation insurance,” states Anne Marie Towle, global captive solutions leader at Hylant.
She explains: “Typically the organisation will finance the primary/deductible layer of risk in the captive, being that from an actuarial viewpoint, the risk is very predictable and organisations have loss history to project future losses.”
Captives
On the types of captives that are the best option to fund workers’ compensation, Aidan Kelly, director of risk finance and captive consulting, global risk consulting and commercial risk solutions at Aon, notes the choices for an organisation to insure workers’ compensation risks will include single-parent captives, group captives and cell captives.
On single-parent captives, Kelly states that these structures account for over 75 per cent of all captives and are wholly-owned subsidiaries of the parent organisation. Therefore, they only write the risks and pay losses of the parent and its affiliates (generally, no third-party risk).
He adds: “They do not transfer risk outside of the economic family of the parent and have an independent governance structure, including a board of directors and officers, annual meetings and detailed operational processes that may be outsourced to third party services providers (i.e. captive managers).”
On group captives, Kelly notes that they are formed by members that come together to form an insurance company. He explains that strict underwriting and governance rules ensure that all members’ risks and exposures are pooled appropriately without unbalancing the financial outcomes of the group captive.
Kelly highlights: “Members’ representatives make up the board of directors, and group captives are generally administered by a captive manager who acts in accordance with instructions from all members.”
He notes that for group captives, it is expected that members may contribute to the losses of other members and vice versa depending on the performance of individual insurance programmes.
On cell captives, Kelly states that they are a growing trend in the US to insure workers’ compensation risks.
He explains: “The cell offers the flexibility and risk financing advantages of a single-parent captive without the requirement to form, own or operate the captive.”
“Cell captives act like a rental facility where capacity in a third-party sponsored captive is made available for a fee. Premiums and losses are paid by the cell and legislation provides for statutory segregation of assets and liabilities between cell operators at all times,” he adds.
Kelly highlights that cells can be opened and closed more efficiently than either single-parent captives or group captives (weeks versus months). However, Kelly adds that the lack of ownership and complete control of the cell captive can be a deterrent for many organisations that may prefer to create a wholly-owned subsidiary than rent space in a third-party vehicle.
On what sort of trends are being seen in workers’ compensation captive programmes, Towle states that workers’ compensation in most industries has still remained fairly flat and somewhat removed from the pressures of the hard market.
She highlights: “We are not seeing the large double and triple digit increases affecting the workers’ compensation market yet. We anticipate there will be some increases as a result of the COVID-19 pandemic claims.”
Stumbles
Reflecting on how the ongoing COVID-19 pandemic has affected workers’ compensation captive programmes, Kelly notes that the impact varied widely across industries and regions, so it is difficult to offer a generalised view. However, Kelly does note noticeable changes.
Kelly explains this includes reduced payrolls and activity impacted certain industries as remote working patterns impacted productivity and demand (e.g. hospitality sector).
Sectors like online retail were largely unaffected, while associated transportation services for consumer goods and food/beverages increased as populations adjusted to social distancing and closure of retail and restaurant outlets.
However, Kelly points out the one extreme change was seen in the healthcare sector, whereby workers’ compensation loss costs are much higher due to COVID-19 exposures.
He explains: “This was entirely unanticipated and was ultimately a direct hit to the bottom line of healthcare organisations whether these retained losses were financed in a captive or retained by the parent organsation.”
“For many clients, the reduced exposures and activities have resulted in reduced premiums for workers’ compensation programmes written by captives. With the extended impact of the pandemic stretching into 2021, it may be a while before the true impact of the pandemic on workers’ compensation exposures and losses is understood,” Kelly adds.
Other than the COVID-19 pandemic, every sector is facing its own challenges. On the types of challenges workers’ compensation captive programmes are facing, Kelly states that workers’ compensation captives have seen requests from parent organisations for consolidation of cash balances to offset revenue shortfalls and increased costs at the parent level.
He notes that payment of captive premiums due by instalments and requests for premium reductions and ‘holidays’ rose in popularity.
Long-standing reserving practices at prudent, conservative levels (above the 75 per cent confidence level) were questioned while modelling at lower confidence levels were examined and pursued.
Kelly notes that while this provides short-term relief in terms of cash flow, the longer-term impact of lower reserving levels may not be understood for a number of years.
He adds: “Other captive lines of business have been subject to higher rate increases and higher retentions. This has put pressure on captive workers’ compensation programmes to maintain their competitiveness to ensure that the entire captive portfolio remains profitable in the short-term , and that the longer-term financial success of the captive is not jeopardised.”
The next level
Reflecting on what will be the big talking points around workers’ compensation coverage in the next 12 months, Towle believes some of the largest talking points will be the continued claims/fallout from the global pandemic and the trend to working at home or a hybrid schedule.
She explains: “With the increase in the number of companies continuing to allow employees to work remotely, the question arises on how to address claims which arise while an employee is working remotely.”
Towle notes that both remote and telecommuting workers are typically covered under workers’ compensation policies if the injury or illness occurs while an employee is completing a work task during work hours.
“Therefore, employers are responsible for providing the same safe work environment for both their on-site workers and remote workers,” she concludes.Workers’ compensation underwriting performance is expected to remain strong in 2021 with favourable results driven by recent reductions in claims frequency and further recognition of material reserve redundancies, according to Fitch Ratings. Workers’ compensation programmes in the US are state regulated, with laws determined by each state legislative body and implemented by a state agency. The programmes provide the payment of lost wages, medical treatment and rehabilitation services to workers suffering from occupational injury or disease. According to the US Social Security Administration, the workers’ compensation system in the US developed from principles enacted in Europe in the late 1800s.
Following public pressure, the US Congress was prompted to pass the Employers’ Liability Acts of 1906 and 1908, which worked to soften the defense of contributory negligence.
During the early 1900s the federal government considered social insurance and welfare to be the purview of the individual states and there was no discussion of a federal occupational injury or disease programme other than the one created in 1908 to cover federal workers.
This meant that each US state passed its own workers’ compensation legislation, with the first comprehensive workers’ compensation law adopted in Wisconsin in 1911, and nine other states passed regulations that year. Some 36 more states followed before the close of the decade.
The last holdout was Mississippi, which finally passed workers’ compensation guidelines in 1948.
“Many organisations utilise a captive programme to fund their workers’ compensation insurance,” states Anne Marie Towle, global captive solutions leader at Hylant.
She explains: “Typically the organisation will finance the primary/deductible layer of risk in the captive, being that from an actuarial viewpoint, the risk is very predictable and organisations have loss history to project future losses.”
Captives
On the types of captives that are the best option to fund workers’ compensation, Aidan Kelly, director of risk finance and captive consulting, global risk consulting and commercial risk solutions at Aon, notes the choices for an organisation to insure workers’ compensation risks will include single-parent captives, group captives and cell captives.
On single-parent captives, Kelly states that these structures account for over 75 per cent of all captives and are wholly-owned subsidiaries of the parent organisation. Therefore, they only write the risks and pay losses of the parent and its affiliates (generally, no third-party risk).
He adds: “They do not transfer risk outside of the economic family of the parent and have an independent governance structure, including a board of directors and officers, annual meetings and detailed operational processes that may be outsourced to third party services providers (i.e. captive managers).”
On group captives, Kelly notes that they are formed by members that come together to form an insurance company. He explains that strict underwriting and governance rules ensure that all members’ risks and exposures are pooled appropriately without unbalancing the financial outcomes of the group captive.
Kelly highlights: “Members’ representatives make up the board of directors, and group captives are generally administered by a captive manager who acts in accordance with instructions from all members.”
He notes that for group captives, it is expected that members may contribute to the losses of other members and vice versa depending on the performance of individual insurance programmes.
On cell captives, Kelly states that they are a growing trend in the US to insure workers’ compensation risks.
He explains: “The cell offers the flexibility and risk financing advantages of a single-parent captive without the requirement to form, own or operate the captive.”
“Cell captives act like a rental facility where capacity in a third-party sponsored captive is made available for a fee. Premiums and losses are paid by the cell and legislation provides for statutory segregation of assets and liabilities between cell operators at all times,” he adds.
Kelly highlights that cells can be opened and closed more efficiently than either single-parent captives or group captives (weeks versus months). However, Kelly adds that the lack of ownership and complete control of the cell captive can be a deterrent for many organisations that may prefer to create a wholly-owned subsidiary than rent space in a third-party vehicle.
On what sort of trends are being seen in workers’ compensation captive programmes, Towle states that workers’ compensation in most industries has still remained fairly flat and somewhat removed from the pressures of the hard market.
She highlights: “We are not seeing the large double and triple digit increases affecting the workers’ compensation market yet. We anticipate there will be some increases as a result of the COVID-19 pandemic claims.”
Stumbles
Reflecting on how the ongoing COVID-19 pandemic has affected workers’ compensation captive programmes, Kelly notes that the impact varied widely across industries and regions, so it is difficult to offer a generalised view. However, Kelly does note noticeable changes.
Kelly explains this includes reduced payrolls and activity impacted certain industries as remote working patterns impacted productivity and demand (e.g. hospitality sector).
Sectors like online retail were largely unaffected, while associated transportation services for consumer goods and food/beverages increased as populations adjusted to social distancing and closure of retail and restaurant outlets.
However, Kelly points out the one extreme change was seen in the healthcare sector, whereby workers’ compensation loss costs are much higher due to COVID-19 exposures.
He explains: “This was entirely unanticipated and was ultimately a direct hit to the bottom line of healthcare organisations whether these retained losses were financed in a captive or retained by the parent organsation.”
“For many clients, the reduced exposures and activities have resulted in reduced premiums for workers’ compensation programmes written by captives. With the extended impact of the pandemic stretching into 2021, it may be a while before the true impact of the pandemic on workers’ compensation exposures and losses is understood,” Kelly adds.
Other than the COVID-19 pandemic, every sector is facing its own challenges. On the types of challenges workers’ compensation captive programmes are facing, Kelly states that workers’ compensation captives have seen requests from parent organisations for consolidation of cash balances to offset revenue shortfalls and increased costs at the parent level.
He notes that payment of captive premiums due by instalments and requests for premium reductions and ‘holidays’ rose in popularity.
Long-standing reserving practices at prudent, conservative levels (above the 75 per cent confidence level) were questioned while modelling at lower confidence levels were examined and pursued.
Kelly notes that while this provides short-term relief in terms of cash flow, the longer-term impact of lower reserving levels may not be understood for a number of years.
He adds: “Other captive lines of business have been subject to higher rate increases and higher retentions. This has put pressure on captive workers’ compensation programmes to maintain their competitiveness to ensure that the entire captive portfolio remains profitable in the short-term , and that the longer-term financial success of the captive is not jeopardised.”
The next level
Reflecting on what will be the big talking points around workers’ compensation coverage in the next 12 months, Towle believes some of the largest talking points will be the continued claims/fallout from the global pandemic and the trend to working at home or a hybrid schedule.
She explains: “With the increase in the number of companies continuing to allow employees to work remotely, the question arises on how to address claims which arise while an employee is working remotely.”
Towle notes that both remote and telecommuting workers are typically covered under workers’ compensation policies if the injury or illness occurs while an employee is completing a work task during work hours.
“Therefore, employers are responsible for providing the same safe work environment for both their on-site workers and remote workers,” she concludes.
