Voluntary Benefits Captives Are Not All Created Alike

How Structure Determines Fiduciary Risk, Employee Value, and Long-Term Sustainability

The emergence of new voluntary benefits captive options signals positive disruption to the poorly financed fully insured market. As the nation’s first and largest voluntary benefits captive program, BeneRe has reviewed a growing number of captive models. While marketing language may sound familiar, it’s important to understand why certain structures can create concerning fiduciary situations.

This article highlights three common captive issues employers should evaluate carefully:

1. Transparency vs. Secrecy
2. Diversified Risk Pooling vs. Employer-Specific Experience
3. Timing and Amount of Surplus Distributions

Key Takeaways

• Not all voluntary benefits captives are structured the same, creating divergent fiduciary risk profiles for employers.
• Diversified risk pooling, transparency, and appropriate release of surplus are indicators of a fiduciary-aligned model under ERISA.
• Employers should evaluate captive programs based on structural integrity for employees, not the promotion of dividends.

1. Transparency vs. Secrecy

Clients, attorneys, and regulators have shared concerns regarding captive models that depend on secrecy to operate the way they do. Captive structures that warrant caution require employers to sign nondisclosure agreements specifically to protect a “regulatory loophole.”

When a structure cannot withstand open review, that alone should give employers pause. In practice, fiduciary decision-making and defensibility depend on transparency.

Transparency is one of BeneRe’s core values and a foundational element of any fiduciary-aligned captive model. Participation agreements, reinsurance economics, and surplus treatment are fully disclosed. No restrictions prevent employers from discussing program structure with their trusted advisors.

Beyond transparency, risk structure is equally important.

2. Diversified Risk Pooling vs. Employer-Specific Experience

Importantly, a critical and often misunderstood element of captive insurance design is the source of risk and the basis for surplus.

Under ERISA, prohibited transactions generally refer to situations involving self-dealing or conflicts of interest. Programs that lack claims pooling introduce a fundamental issue: an employer may directly benefit when its own employees do not fully utilize coverage.

Regardless of how the surplus is redeployed, this misaligned incentive may create fiduciary exposure, as outlined in recent ERISA litigation targeting excessive commissions used to finance “benefits banks” for employer use from direct employee dollars.

BeneRe pioneered a fiduciary-aligned structure whereby risk is pooled across independent participating employers. Claims are paid from a large, diversified risk pool: and surplus, if any, is based on aggregate pool results.

For payroll-deducted voluntary benefits, this structure prevents an employer from receiving surplus from its own employees’ claims experience and mitigates potential conflicts of interest.

Timing also matters.

3. Timing and Amount of Surplus Dividends

Notably, a captive program that advertises accelerated release of claims surplus, as early as 90 days into the plan year, implicitly acknowledges that employees are being overcharged to create an early distribution to the employer.

Some captive distributions have been marketed to be as high as 40 percent of employee premiums. This approach prioritizes accelerated cash flow and maximum employer resources, sacrificing lower cost and better protection for employees who are being payroll deducted.

BeneRe does not release surplus funds until the full policy year has ended and claims outcomes for employees are fully determined. A conservatively structured captive model focuses on appropriate pricing levels set to meet projected claims obligations.

Employee coverage should never be underwritten to accelerate cash flow or engineer a large distribution.

Taken together, these structural elements determine fiduciary alignment.

Summary

Captive programs that look similar on the surface can produce dramatically different fiduciary risk profiles.

Employers evaluating voluntary benefits captives should focus less on the timing and size of promised dividends and more on structural integrity and value for employees.

BeneRe pioneered the voluntary group captive solution to align with ERISA fiduciary principles, maximize employee plan value, and create durable, defensible economics over time.

In a world of increasing scrutiny, structure is strategy.