Group captive insurance is a model supported by BeneRe to benefit employees and employers. Here’s how the bowl of skittles works.

Key Takeaways

  • Captive insurance companies write coverage for very specific risks, typically among a small group of participants
  • A single-parent insurance company is a type of captive insurance structure that benefits one corporate entity
  • Voluntary benefits usually can’t be included in the single-parent captive insurance model without a DOL exemption due to conflicts of interest
  • Voluntary benefits work well in a group captive model because risks are shared across employers and claims are paid out of the same pool
  • This model avoids any conflict of interest and removes the need for an exemption to offer your employees great voluntary benefits

There are many moving parts to the insurance market, and employers take on a variety of strategies to both protect their employees and find the best plans for their needs.

Captive insurance is a common structure in which a company has its own insurance company to insure its own risks, which puts its capital at risk but operates apart from the insurance market. This model is an alternative to self-insurance, where a company would set up a separate sort of savings account to be used for insurance claims. A captive insurer is an actual insurance company created by the business.

To fully understand the concepts we’re discussing, let’s also touch on risk pooling. A risk pool is a group of policyholders who share the financial risks associated with high insurance claims. Premiums are calculated based on combined risks and costs. Risk pooling helps offset the riskier individuals in the plan by insuring people who aren’t as likely to need insurance. Usually, the larger a risk pool, the more stable and predictable premiums are for the group.

This article will walk through what single-parent captive insurance companies are and how the group captive model is effective for the voluntary benefits market.

What are single-parent captive insurance companies?

There are about 6,000 captive insurance companies around the world. The vast majority of very large employers own their own insurance companies, which are known as single-parent captive insurance companies. These companies write insurance coverages like workers’ comp, auto, general liability, and increasingly medical stop loss. 

The risk managers at these companies would love to be able to include voluntary benefits in their single-parent captives because of benefits like:

  1. Low-loss ratios: Not much loss from paid claims versus the amount of premiums earned.
  2. Non-correlated risk: Voluntary benefits aren’t correlated to other types of insurance like general liability, so they’re a good hedge against the overall risk profile of the captive.
  3. Short-tailed: Unlike workers’ compensation or general liability claims, which can take years to reach the final claim amount, voluntary benefits claims are closed at the end of the year with quick turnaround times. 

However, including voluntary benefits would be a prohibited transaction under the Employee Retirement Income Security Act (ERISA) since it is a conflict of interest. The company would directly profit off its own employees, so it’s not considered fair and is restricted by the U.S. Department of Labor (DOL).

Nearly 30 companies have received prohibited transaction exemptions from the DOL over the years, where a really big employer wants to write life or disability insurance into its captive. This helps them lower the price for employees and add more coverage. The DOL has seen that it’s a better deal for workers, so they’ve granted these exemptions in a program called EXPRO, or expedited approval. 

However, these exceptions have never been granted for voluntary benefits like accident, critical illness, or hospital indemnity — they’ve only been granted for employee-paid life insurance and disability, and only for really big employers. Life and disability insurance systems already work pretty well and have well-established financial models and profit benchmarks, so the conflict of interest is limited because there’s not a huge incentive for companies to offer these coverages for high profits. That’s not the case with voluntary benefits. 

A group captive model for voluntary benefits

As mentioned, none of the exemptions from the DOL have been for voluntary benefits. BeneRe’s model removes the need for an exemption with its captive insurance model. Let’s talk about how it works.

The group captive model is based on a pool of employers where we’ve removed the conflict of interest. Employees receive a fully insured program through a leading insurance carrier, and BeneRe reinsures the risk with the pool of employers.

This is where the bowl of skittles idea comes in. Each group within the plan is made up of its employees. Imagine these groups are their own different colors. All contributed dollars go into the pool together, where they get mixed together, and all claims for the voluntary benefits programs are paid out of that same pool. 

At the end of the year, dividends are paid back to the plan, and it becomes a rainbow. Everyone is represented there together, which creates zero incentive for employers to try to maximize their profits on their own employees. If an employer is just 5% of the pool, 95% of the underwriting gains from their own employees would go to everybody else. So, they participate pro-rata and get a rainbow of colors back as a dividend. 

Our group captive model is a risk-sharing model where we have to be very disciplined in underwriting. While everyone is underwritten consistently and enters the program with their own unique plan designs, each program is priced to an identical target claims ratio based upon their unique census and plan offerings.

Another benefit to risk sharing in this model is that all of the policies are non-catastrophic. The biggest claim may be $30,000, and there are currently about 300,000 eligible employees in the program. So, it’s very predictable and credible. We take what’s happened in the past and use it as a great predictor for what’s to come in the future. Having year-end dividends to reinvest for employees has also been consistent. That predictability of partnership and stability is something leading employers want to provide for their employees.

Why BeneRe?

BeneRe is committed to transparency with our competitive voluntary benefits program. We always disclose all compensation and disburse 100% of underwriting gains back to employers on a pro-rata basis. The insurance carrier still holds all contributed dollars until final claims are paid, which further protects employees, and all risks from employer-sponsored programs are reinsured.

Find out more about how our group captive model works. Reach out to BeneRe for a complimentary financial analysis of in-force programs.