2016 was a challenging year for captives with much attention being placed on Solvency II, BEP’s and Employee Benefits (EB). Now 2017 is in full swing, it is clear to see that last year’s three hot topics are going to continue as trends in the market for the foreseeable future.
Following on from the discussions at the European Captive Forum late in 2016, we are reflecting on each of these areas. Hopefully, breaking down what to expect in 2017.
Starting with Employee Benefits…
2016 certainly saw multi-national organisations become more interested in a captive solution for their EB. The way in which organisations approach EB is varied. Bringing EB under a single umbrella means getting HR on side, as every employee is a stakeholder and HR owns the relationship with the local entity and the local insurer. First and foremost, implementing a single EB policy requires an understanding of what it is that is really needed; from HR and from Risk Managers. From there, establishing what the next steps should be is key.
Some multi nationals will already have non-life captives in place. For these organisations it is essential to consider the risk appetite for EB within the captive and to conduct a thorough risk assessment. There may be a lack of EB expertise and the risk management approach that is required is different for non-life business.
In our review of the EB issues we have noted that 5 key areas need to be considered:
- Policy conditions
- Capacity Issues
- Underwriting
- Valued Assets
- Evolution of Management
Having flexible policy conditions is a key consideration for every organisation in order to attract the right skills, as this could aid the negotiation process between HR and the on boarding of new employees. Flexibility could include high-risk sports, suicide and war risk. These risks would be individual requirements, possibly due to location or personal activity.
Capacity can be affected by a number of things. Terrorism, earthquakes, pandemics to name just a few. Having a captive to uphold this risk will assist in reducing the impact that any such event may have. Major loss in anyone area is not often considered.
An ageing workforce is becoming a growing consideration as the population has an increased life span. The ability to cover more senior employees without them having to be medically underwritten for full cover provides an extra service but also comes with a risk. Waiting periods and pre-existing conditions are also areas where underwriting should be considered.
People are increasingly seen as the most valuable assets in an organisation. Especially in knowledge-intensive organisations such as financial institutions and technology vendors. Health and safety, behaviour, culture and governance should all be considered against valued assets.
Business performance is often linked to quality management and staff engagement. Weakness in the management area could pose a serious threat to the valued assets of an organisation. Poor leadership, ethos, communication and cultural understanding and awareness are all linked to valued assets. Without an evolving management structure to incorporate these considerations the risk is heightened.
Some organisations have already included EB within their captive with or without significant retrocession. And only a small number of EB only captives have been set up so far. It seems that no one is willing to lead the way as the variables are so broad. What works for one may not for another. Some key governance activities include:
- The selection of preferred partners
- Negotiating central and / or local fees
- Determining whether to permit local underwriters to set the price or whether to dictate the price centrally
- Working with each local entity to determine if they will use the preferred partners or justify use of alternative providers
- Analysis of the price to determine the potential profit / loss and whether to reinsure the contract within the captive or whether to exclude it.
There appears really to be no right or wrong approach. Just a long list of considerations and associated risks. HR and Risk Managers are certainly having to work closer than they ever have before. Balancing the provision of an attractive offer, no matter location, ethnicity, age etc with a reasonable associated risk is certainly the key to a successful EB captive.
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