Case Studies in Success: Employee Benefits in Single-Parent Captives Overview of Captives Prevalence of Captives Overview of Captives & Employee Benefits Why Are Captive Benefits Programs Established? The Process (Key Tasks) for Captivation of US Benefits A Few Misconceptions The Realities Case Studies: More detail on Why Establish a Captive Benefit Program? Family Business (Captive Life / Disability) Health Provider System (Captive Financing of Health Benefits) Lessons Learned Profile of Success Q&A 1
Overview of Captives Captive = special purpose insurance company Does not transact business with general public Insures only risks of captive s owners, affiliated entities, or certain other circumscribed risks Less stringently regulated than commercial insurer doing business with general public Complements the commercial insurance marketplace But, risk insured through a captive is owned by the captive s owner Captives don t shift risk away! Captive domiciles many states and foreign countries permit the establishment of captives Prevalence of Captives... 5,000 captives worldwide $50 billion annual premiums 50% of US commercial lines written through captives 80% of S&P 500 companies use captives 2
Overview of Captives & Employee Benefits Since 2000, the Dept. of Labor (DOL) has been approving fronted captive employee benefits arrangements Example: Employer s group Life / Disability program underwritten by, e.g., Prudential is reinsured by Pru to employer s captive Currently approximately 40 such DOL approved arrangements (see next slide) However, not all employee benefit captive arrangements require DOL approval! Overview of Captives & Employee Benefits... Single-Parent Captives with EB s Department of Labor Data YEAR APPROVED COMPANY COVERAGE YEAR APPROVED COMPANY COVERAGE 2000 Columbia Energy, VT Long Term Disability (LTD) 2003 Archer Daniels Midland, VT Group Life 2003 International Paper, VT Group Life & Accidental Death and Dismemberment (AD&D) 2004 Alcon Laboratories, VT Life & LTD 2004 SCA, USVI Life & AD&D, LTD 2005 Alcoa, VT Life & AD&D 2005 Sun Microsystems, VT Life 2006 Astra Zeneca Pharmaceuticals, VT Life & AD&D 2006 AGL Resources, HI Life & AD&D, LTD 2006 H.J. Heinz Life & AD&D, LTD 2006 Wells Fargo, VT Life & LTD 2008 Cephalon, Inc., VT Life & AD&D, LTD 2008 ConAgra Foods, Inc., VT Life & AD&D 2008 DPWN Holdings, VT LTD 2008 United Technologies Corp., VT Life & AD&D, LTD 2008 Memorial Sloan Kettering Cancer Center, VT Life & LTD 2008 YKK Corp. of America, VT Life & AD&D 2008 Banner Health, USVI Life 2009/2010 Microsoft Corporation, VI Life & LTD 2009 Dow Corning, DC Life & LTD 2010 Subaru, SC Life 2010 Coca Cola, SC Retiree Medical *Source: CICA Conference Session on EB in Captives from Department of Labor Statistics 3
Overview of Captives & Employee Benefits... Current Insured US Benefit Plan Structure OUTSIDE PARTIES EMPLOYEES Employees BENEFIT CLAIMS EMPLOYER INSURANCE CARRIER EMPLOYER & EMPLOYEE DIRECT PREMIUM Overview of Captives & Employee Benefits... Structure of Captive Arrangement OUTSIDE PARTIES EMPLOYEES Employees BENEFIT CLAIMS CLAIMS EMPLOYER CAPTIVE INSURANCE CARRIER REIN. PREM.. 4
Overview of Captives & Employee Benefits... Structure of a Typical Stop-Loss Captive Program Excess claim submission Captive Insurance Company Excess reimbursement Stop loss premiums Employer Claim funding TPA Claim submission Claim reimbursement to Employees Employees Why Are Captive Employee Benefit Programs Established? UNDERWRITING GAINS FOR CAPTIVE CAN MAKE SENSE IF... THIRD PARTY UNRELATED BUSINESS FOR CAPTIVE BETTER CONTROL OF RISK PREVIOUSLY CEDED TO COMMERCIAL MARKETS 5
The Process (Key Tasks) for Captivation of US Benefits... Data Collection Select Benefits Retain Independent Fiduciary Fiduciary Opinion Select Enhancements Participant Notices Draft DOL Application File DOL Application Tentative DOL Approval DOL Approval Fronting Carrier Agreement Captive: Business Plan Reserves Collateral The Process (Key Tasks) for Captivation of US Benefits... Fronting Carrier Statutory Reserve Requirements Obligation Assets Assets held in Reg 114 trust or via LOC Open Claim Reserves + IBNR Reserves = Reg. 114 Trust Assets Remember: Captive employee benefit arrangements require capital/surplus (just like any other type of insurance arrangement) 6
A Few Misconceptions... Employee benefits captives are only for jumbo sized employers All captive employee benefit programs must be approved by the Dept. of Labor (DOL) There s just no way that Risk/Finance and HR will ever see eye to eye regarding the advantages of a captive employee benefit program The whole process is just too complex for us to deal with We could get permanently locked into a program we re just not happy with The Realities... Not just for jumbos At least 3 of the DOL approved arrangements involved less than 3,000 lives Medical stop loss programs (no DOL approval generally required) routinely involve less than 3,000 lives DOL approval not always required The legal structure of a captive arrangement can sometimes preclude the need for DOL approval Medical stop loss generally does not require DOL approval Risk and HR can find common ground Financial advantages of captive arrangement No interference with benefit design or employee relationships Win/Win The process is a bit unfamiliar but it can be mastered (and often has been mastered!) Exit strategy is routinely incorporated into captive arrangements 7
Case Studies: More detail on Why Establish a Captive Benefit Program? Family Business (Captive Life / Disability) Health Provider System (Captive Financing of Health Benefits) Case Study Family Business Situation: Privately held, diversified group of real estate and transportation companies with a total of approximately 7,000 employees Captive for Property & Casualty ( P&C ) risks Captive owned by family members (both directly and via family trusts) Profitable Life / Disability programs insured by a major commercial carrier Business Objective: Capture underwriting gains currently being reaped by commercial Life / Disability carrier Obtain additional 3d party unrelated business for captive to expand captive s P&C activities on a tax efficient basis 8
Case Study Family Business... FAMILY OPERATING COMPANIES CAPTIVE (Captive insures operating companies) Case Study Family Business... Client Captive Scenario Analysis Rate Decrease 0.0% 5.0% 10.0% 15.0% 20.0% Annual Premium 6,371,227 6,052,666 5,734,105 5,415,543 5,096,982 Loss Ratio 53.4% 56.2% 59.3% 62.8% 66.8% Base Fee 18.9% 18.9% 18.9% 18.9% 18.9% Stop Loss Fee 2.0% 2.0% 2.0% 3.0% 4.0% Additional Fee 0.0% 1.0% 2.0% 3.0% 4.0% Total 20.9% 21.9% 22.9% 24.9% 26.9% % to Captive 25.7% 21.9% 17.8% 12.3% 6.3% $ to Captive 1,637,119 1,324,622 1,018,496 664,585 323,417 Total w/rate Guarantee 25.9% 26.9% 27.9% 29.9% % to Captive 20.7% 16.9% 12.8% 7.3% $ to Captive 1,318,558 1,021,989 731,791 393,808 Note: L/R above excludes conversion and ported claims. Carrier pays Life and LTD conversions; ported claims will be ceded to client. Above assumes no rate guarantees offered. 9
Case Study Health Provider System Situation: Association of 8 hospitals in Southeastern US Each hospital had its own self funded health plan for its own employees Each hospital purchased Medical Stop Loss in the commercial market Each hospital owned shares in Corporation, which was established to provide various administrative services to member hospitals Corporation owned a single parent Captive, which established a Captive to insure members Professional Liability (Medical Malpractice), Workers Comp, and General Liability Business Objective: Obtain cost savings by insuring Medical Stop Loss through captive, rather than through commercial market Case Study Health Provider System... Excess claim submission Captive Insurance Company Premiums Claims Excess Loss Underwriter Excess reimbursement Stop loss premiums Hospital A Hospital B Hospital C Hospital D Hospital E Claim funding Health Plan Claims Administrators Claim submission Employees Claim reimbursement to Employees / medical providers 10
Case Study Health Provider System... Stop Loss Claim Distribution $4,500 $4,000 $3,500 $3,000 Commercial Premium Captive Claims + Expenses Paid Claims $2,500 $2,000 $1,500 $1,000 $500 $0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 (thousands) Loss Percentile Case Study Health Provider System... Medical Stop Loss Premium Components (2012) $1,600,000 $1,400,000 $1,200,000 $336,539 $311,539 $25,000 $1,000,000 $800,000 Contribution to Captive Expense Projected Claims $600,000 $1,244,728 $1,244,728 $400,000 $200,000 $0 Commercial Captive 11
Lessons Learned Profile of Success Benefits complement a P&C captive program Captives generally not established solely for benefit program Clear business goal, e.g., Eliminate market inefficiencies Capture superior loss experience 3d party business to expand captive s P&C applications Making the business case for the captive arrangement Essential in obtaining buy in of both Risk and HR Execution assembling the right team: Risk / Finance HR Legal Consulting assistance Questions and Answers 12