Spring Consulting Group
Respondents to a Spring Consulting Group survey revealed that they met the objectives they originally set out to achieve when starting an employee benefit captive. Spring’s Peter Bandarenko explains
What is your role at Spring Consulting Group?
I am a senior consultant at Spring Consulting Group. Spring is an actuarial, risk management and employee benefits consulting firm. We work with plan sponsors and captives of all types and on all matters. The work we do includes the specialised focus of helping captive owners add employee benefits to their captives. We are experts in this field and have consulted with more than a third of all the companies that have gone through the US Department of Labor (DoL) prohibited transaction exemption process.
How do you define an employee benefit captive and its uses?
Captive owners often establish a captive for business/property casualty risk, so we define it as the ability to include their own employee benefit plans in an existing captive.
Captive owners are excited about doing that because it introduces diversity, risk distribution and third-party risk into their captives, which can create cost savings and tax efficiencies for the business and the captive. In addition, it also supports the emerging trends toward total enterprise risk management by aligning the management and oversight of the business risks for a company as well as the people risks, including the employee benefit risks.
What are the key advantages to placing employee benefits in a captive?
One of the major drivers behind the introduction of employee benefits into a captive is cost savings. Just as with other property and casualty coverage lines being introduced into a captive, the ability for the captive to recoup carrier-underwriting profit is a very attractive option. Another key driver is the whole concept of risk diversification and introducing third-party risk to the captive. Diversifying the business mix in the captive provides more consistent profitable results over time and can also drive tax efficiencies for the captive.
And do you believe there are any negatives?
There are no universal negatives. It does require a unique alignment between risk management and human resources, so companies that are not aligned in that way or not looking at a collaborative stakeholder engagement that involves both sides, might find it a challenge. This is not a detriment per se but a hurdle that has to be overcome.
Why did you recently conduct a survey on employee benefits, and what did you find out?
The first US employee benefit captive transaction that was granted a prohibited transaction exemption (PTE) from the US DoL occurred in 2000. Since then, more than 30 companies have followed suit.
We felt it was to time to pause and ask these pioneers to reflect back on their experiences with adding employee benefits to their captive and share their collective perspectives. Our mandate for the survey was to first identify these pioneers, then ask them to respond to our survey with the ultimate goal to evaluate whether adding employee benefits to their captive proved to be a fruitful exercise.
At Spring, we wanted to know what were the perceived advantages originally were, what were the primary business objectives for heading down this path, and to confirm whether these objectives have been met.
We also wanted to see if these these original objectives have shifted, and if so, how they have changed and evolved. We also wanted to capture the best practices and advice these pioneers could share for companies now contemplating heading down this path today.
There are always lots of industry insider discussion about the merits and advantages of introducing employee benefits to captives—we felt it was important for the industry to hear the objective voice of those who had done it.
Have companies that have employee benefit captives met the objectives they originally set?
The overwhelming majority of respondents said that they have met the objectives they originally set out to achieve. The most common objectives noted were cost savings, alignment and overall control of their entire risk pool. Other objectives mentioned include tax efficiencies derived by introducing third-party risk.
In terms of what’s coming next, there is a clear interest by the majority of respondents to continue to expand other coverage lines, including medical stop-loss, and to even consider including the spectrum of emerging voluntary benefits as well. The clear trend in responses suggests that those who have embarked on employee benefits in captives are glad they did and, in fact, they intend to go further.
What new emerging risks do you think companies are considering and why?
Our survey revealed that adding voluntary benefits are the top emerging employee benefit risks being considered for addition to captives. The pioneer companies first started with their group life and disability plans, and as the market is moving toward expanding voluntary benefit offerings, captive owners are focusing here as well. In response to the Affordable Care Act (ACA) and the expansion of high deductible health plans, plan sponsors and carriers are introducing new voluntary benefits to the financial gaps that are being created by them. Products such as critical illness, group accident and sickness and hospital indemnity are all seeing tremendous growth in the market, which creates new opportunities for captive owners to consider for their captives.
What other results were revealed in the survey?
In terms of non-employee benefit risks, the survey confirmed that more and more captive owners are looking at adding medical stop-loss insurance as the self-insured medical market is expanding.
Cyber risk, reputational risk, and product warranty are high on the list as well.
Do you think employee benefits will continue to be a success in the future?
Yes, there is no question about it. The look back at the first 15 years of benefits in captives has revealed that it is meeting market needs and expectations. As the market continues to expand, the impediments, perceived or real, become easier for companies to navigate. The regulatory framework continues to be supportive, especially with the DoL reinstituting the EXPRO approval process again in 2014.
We continue to see new companies stepping into the benefits in captive realm and expect to see the trend of three to five new DoL PTE requests per year, continue year over year. Lastly, with the explosion of interest in mid-market medical stop-loss captives, we expect to see an acceleration in the number small- and medium-sized companies going down that path.
