Transcript The Bermuda Market in 2005

www.bermudacaptive.bm
JUN 2 - 4, 2014
Employee Benefits
A spectrum of opinion
Employee Benefits a Spectrum of Opinion
Moderator:
• Brian Quinn, Managing Director, Granite Management
Speakers:
• Jim Long, VP Client Relationships, Maxis
• Paul Sprague, Director Chemical Ins. Co. Ltd., a BASF
Company
• Diane Nendick, Global Benefits Manager, Microsoft
• George O’Donnell, Technical Director, Aon
Employers that have used captives for U.S. EB
• Currently 21
companies
have received
approval from
the U.S. DoL
• Many more
pending
• Regulations
tightening
Insured EB Funding Mechanisms
LEAST
FINANCIALLY
EFFICIENT
MOST
MULTINATIONAL
POOLING
CAPTIVE
REINSURANCE
INSURED
FULLY INSURED
STOP
LOSS
SELF
FINANCIALLY
EFFICIENT
Maxis Network
A Fronting Insurer’s Perspective
Fronting Insurers Issues
• Implementation: Company and fronting insurer key issues
• Situs: Solvency 2/FATCA/other issues
• Coverage's: Life/LTD/Medical/Voluntary/Stop Loss
• New Horizons: DB buyouts, Ret Med, PCC’s for smaller
groups
• Success? How to define in years 1 -5?
Fronting Insurers Issues
• Expenses: Local fronting & Central coordination charges
• Collateral: Cost of capital/reserve relief
• Limits on ceded risk: Government imposed or insurer ‘rules’
• Structure: AP in advance/Quarterly in arrears/Other?
• Risk Management: Stop Loss and Cat Re?
BASF Case Study
A Risk Manager’s Perspective
BASF Case Study (Cont’d)
• US Benefit Risks – How BASF May Involve the Captive
– BASF will postpone utilizing captive for ERISA-regulated benefits
• Reason: ERISA & DOL impose significant requirements, e.g.:
– DOL exemption
– Prohibition against commissions
– Independent fiduciary to review and monitor the arrangement
– Time and cost to administer
– Major area of initial focus: Medical Stop Loss
• Indemnifies the employer, not employees
• DOL does not consider Medical Stop Loss an “employee benefit”
BASF Case Study (Cont’d)
– Rationale for Medical Stop Loss + Captive
• Exposure to “catastrophic” medical claims has increased with the Patient Protection
and Affordable Care Act (“Obamacare”)
– Elimination of liability caps for plans
– Increased availability of health coverage will accelerate trend for large claims
– Although BASF can absorb health benefit risk, BASF desires to establish formal
risk funding mechanism
• BASF already owns the risk so Medical Stop Loss will dampen year over year volatility
rather than reduce costs
• Including Medical Stop Loss with uncorrelated P&C risks can smooth the captive
financial results over long term
BASF Case Study (Cont’d)
• Strategy for non-US Insurable Employee Benefits
– The company is conducting a feasibility study to involve Bermuda
captive
– Goal is to replace “out of date” pooling arrangements with more
efficient captive program
– Operational advantages may include streamlining of the administrative
process, greater oversight of loss analysis and risk mitigation practices
– Financial advantages may include cost of financing employee benefits,
and cash flow
– Employee advantages may include security of highly rated partners,
competitive premiums and plan designs
Microsoft Case Study
A Human Resource Manager’s Perspective
Reasons for change
Background:
Microsoft promoted multinational
pooling to international subsidiaries
to optimize their international
benefits spend
We had three preferred pooling
networks (Generali, Insurope and IGP)
Pool performance had been very
strong the last few years; however, we
believed there were additional cost
savings and advantages to using a
captive
Captive arrangement existed for some
US Benefits
Advantages we identified for using a captive:
Local subsidiary should make significant further savings
on international benefits spend (remove insurer profits
and reduce need for broker)
Improved corporate governance, visibility and centralized
control of benefit pricing and plan design
Potential to earn greater investment income by captive on
premiums and reserves that are held by captive
Diversifies the risk of our existing captives and supports
corporate initiative to move toward captive-centric
framework
Increases captive leverage with reinsurance market
Key Principles for Change
Key Principles:
•Financial Savings
– Subsidiary - cost savings immediately realized fully by
subsidiary in terms of upfront premium reduction
– Corporate – optimize international benefit spend for
subsidiaries and potentially realize other efficiencies
(investment income, diversified risk, and leverage in
reinsurance markets)
•Plan Design
Scope:



Local provider (if coverage not currently by captive
provider)
•Administration
Terms and conditions equal to or better
– Local insurer is strong in local market and provides quality
Role of local broker
service and administration
– No increase for ongoing administrative efforts by local
subsidiaries
Out of Scope:


– No change to plan design or coverage level
– Terms and conditions are equal to or better than previous
local insurance contracts
– Move all insured Life, Disability and Accident policies into
captive where legally permissible
– Encourage insured Medical policies to captive (not
mandated)
– Retirement plans will not be considered for captive
Changes to plan design or coverage level
Local subsidiary continues to manage relationship
with local provider
How we made the change
Cross functional Steering Committee
Project Core Team:
Business Risk Management
Global Benefits
Captive Manager
Joint
Executive
Sponsors
Joint Business
Owners
Implementation Plan
Year 1
• Generali existing pool converted to
full captive arrangement
• Medical policies moved
opportunistically
Year 2
• Non-pooled countries Life, Accident and
Disability policies moved to captive
arrangement
• Medical policies moved opportunistically
Year 3
• Other pooled Life, Accident and Disability
policies moved to captive arrangement
• Medical policies moved opportunistically
Success measurement
•
•
•
Incremental savings over 3 years (actual saving less pre captive average cumulative pooling dividend)
Individual subsidiary savings range in terms of % rate reduction
Migrated subsidiaries respond 70% favorable to captive project
Results
Results (75 “countries” migrated to captive)
•
“Incremental savings over 3 years (actual saving less pre captive average cumulative pooling)”
Achieved:
Incremental savings almost double our expectation
•
“Individual subsidiary savings range in terms of % rate reduction”
Achieved:
Minimum individual saving within 1%
Maximum individual saving almost double our expectation
•
“Migrated subsidiaries respond 70% favorable to captive project”
Achieved:
95% favorable
A Consultants experience
US Captive Benefits Landscape in 2014
• Healthcare Restructuring
– US healthcare sector = 15% of US economy
– Profound healthcare restructuring is underway
– Major drivers:
• Patient Protection and Affordable Care Act
(“Obamacare”)
• Global economic pressures – US health
costs are (way!) out of line with US’ trading
partners
– Emphasis on “Accountable Care”
US Captive Benefits Landscape in 2014 (Cont’d)
• US Healthcare and Employers:
– No caps on employer health plan liability
• Employers have to re-think risk management for health
benefits
– Shifting organizational responsibilities within employers –
greater role for Risk Management in managing health risk
– Increasing recognition of captive’s role
– Increasingly sophisticated reinsurance markets for captive
health programs
– Rev Rul 2014-15 may create new opportunities
US Captive Benefits Landscape in 2014 (Cont’d)
•
US Healthcare and Health Providers
– New applications for captives:
• Provider Risk under Accountable Care risk-sharing contracts
• Participation in health plans marketed by insurance carriers
• Medical Stop Loss for the provider’s employees
– New applications complement traditional applications involving Professional
Liability
– Rev Rul 2014-15 may impact non-profit organizations
US Captive Benefits Landscape in 2014 (Cont’d)
• EXPRO (Dept. of Labor Approvals)
– Advance DOL approval generally required for Life, LongTerm Disability (“LTD”), Accidental Death & Disability
(“AD&D”)
– Previous expedited review & approval process known as
“EXPRO”
• About 30 captive arrangements were approved under
EXPRO
• EXPRO expired by 2012
US Captive Benefits Landscape in 2014 (Cont’d)
• Since 2012, Coca-Cola and Intel have obtained individual (nonEXPRO) exemptions from the DOL
• At least two other individual exemption applications have been
submitted to the DOL
• Others are “in the pipeline”
• It appears likely that the next DOL approval will be granted
under EXPRO
US Captive Benefits Landscape in 2014 (Cont’d)
• Summary
– 2014 will be a pivotal year for US captive benefits programs
• Utilization of captives by employers for health benefits
• Utilization of captives by health providers
• New tax guidance
• EXPRO reinstated