Insurance coverage is available for nearly every type of business risk, with cost and amount of coverage varying greatly among companies. How do treasurers manage a variety of insurance programs including D&O, workers comp, and general liability business interruption insurance? And with DB pension funding at the highest levels since 2007, with overfunding a possibility for many, is this the time to think beyond fixed-income hedging to risk transfers to insurance companies or managing longevity exposure in-house?
At a May meeting of The NeuGroup’s Treasurers’ Group of Thirty-2, members discussed insurance issues, particularly the benefits of a captive. And in one session, a member led the group through a review of the corporate insurance program at his company and how it has used captive insurance entities to manage a variety of programs including its captive for pensions.
One result of the discussion was revelation that captives are coming now coming back on shore. What were once vehicles purchased and managed in exotic offshore locales like Bermuda, the Cayman Islands and Barbados. But today many captives are being formed in the US and used for things like property and casualty insurance programs, workers’ compensation programs, reinsurance, fronting arrangements and assumed casualty claims.
Captives are also expanding scope. They now include certain employee benefit obligations like international life, disability and medical insurance, US post-retirement medical benefits and pension plans. Based on the session presentation, some of the benefits of this type of expansion include centralized management, reduction of overall insurance costs, increased scale, and efficient tax treatment for all captive premiums due to third-party business mix.
At the company of the presenter, the captive assumes 100 percent of the risk and holds 100 percent of the premiums and reserves (where legally possible). They use two fronting companies to issue local insurance policies and provide administration. The annual premiums are dictated by the captive and are based on experience and overall risk philosophy.
This company has also taken the captive philosophy in a new direction with the creation of new captive for pensions. This new structure requires long-term contracts with credit protection measures and segregated cells within the captive for bankruptcy protection. Insurance regulations apply as it relates to solvency capital requirements and governance intensity.
Another use is in reinsuring post-retirement medical costs of former employees. Based on a very recent IRS ruling, a corporation’s retirement benefits constitute “Insurance” within subchapter L of the tax code, which now allows these types of costs to fit within, and take advantage of, a captive reinsurance structure. This was seen as a very positive ruling and encouraging from a captive perspective.
So it’s a fairly dynamic time in the captives market. Captives are taking on a new and improved roll in the overall risk management strategy of many an organization. They are now being used to manage certain employee benefit obligations like international life, disability and medical insurance, US post-retirement medical benefits and pension plans. The benefits of these new captives include centralized management, reduction of overall insurance costs, increased scale, and efficient tax treatment.