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Funding Benefits through Captive Insurance Companies Continues To Grow

Employee Benefits Captives Growing-SF
November 15, 2017

Hyatt Hotels Corp. is the latest employer to win federal regulatory approval to fund employee benefits through its captive insurance company, and more companies are certain to follow.

Under Hyatt's proposal, approved by the US Department of Labor last month, the huge hotel chain will use, starting next year, its Arizona-based captive, Xenia Assurance Co., Inc., to reinsure Hyatt life insurance and short-term and long-term disability policies written by Metropolitan Life Insurance Co.

Those coverages will join other risks—auto liability, general liability, employment practices liability, crime, property, and workers compensation—Hyatt now funds through its 4-year-old captive.

To meet a Labor Department requirement—improving a benefits program—necessary to win regulatory approval for a captive benefits funding arrangement—Hyatt will offer, at no cost to employees, a core short-term disability (STD) benefit that will pay eligible employees 50 percent of their wages.

"This is a new benefit for employees who have had to buy voluntary coverage or be exposed in the event of disability. Now, all employees will receive core STD coverage," Hyatt said in a notice provided to employees and included in its documents filed with the Labor Department.

Hyatt joins roughly three dozen employers, including such well-known corporations as the Coca-Cola Co., Intel Corp., and Microsoft Corp., that have received Labor Department approval in recent years to fund employee benefit risks through their captive insurance companies.

There are several reasons driving employers to fund employee benefits programs through their captive insurance companies, experts say.

One captive benefits funding driver is cost savings compared to buying coverages in the traditional commercial market.

"There can be cost savings on the benefits side," said Karin Landry, a managing partner with Spring Consulting Group in Boston. Spring filed Hyatt's captive benefits application with the Labor Department.

Those cost savings are possible because the captive, not an outside insurer, will earn any underwriting profit, as well as investment income earned on premiums a parent pays to the captive.

Another driver, says Nancy Gerrie, a partner and cochair of the employee benefits practice at Winston & Strawn LLP in Chicago, is risk diversification. Through such diversification, profits, for example, earned from funding benefit risks can offset losses—when that happens—from property-casualty lines written through captives.

Still, there are costs that employers need to consider when evaluating whether it makes financial sense to fund benefit risks through their captives. For example, the Labor Department requires that captives use a highly rated commercial insurer to issue policies, which are in turn reinsured by the captive.

In addition, employers have to budget for the time the Labor Department needs to review captive benefits funding applications.

The fastest application and review process—known as expedited process, or EXPRO—takes about 2-1/2 months. Applications that do not qualify for EXPRO typically take two to three times longer.

However, to qualify for EXPRO, certain conditions have to be met, such as enhancement of at least some of the benefits that will be funded through the captive.

In addition, an applicant has to cite two substantially similar individual exemptions approved by the Labor Department in the last 10 years, or one similar application approved in the last decade and one approved through EXPRO in the last 5 years.

In its application—considered under the EXPRO review process—Hyatt cited captive benefits funding applications filed earlier by Coca-Cola and Intel Corp. and approved by the Labor Department.

With EXPRO, the application process is fairly easy, said Marsh Captive Solutions' Art Koritzinsky, who serves as Americas captive advisory leader in Norwalk, Connecticut.

To be sure, not all captive benefits funding arrangements require Labor Department approval, with medical stop-loss insurance or reinsurance one of the best-known examples of coverages exempt from the federal regulatory review process. Medical stop-loss coverage provides a cap on the amount of losses self-insured employers can incur on healthcare plan claims. Since the stop-loss coverage does not pay benefits to plan participants, the arrangement does not require Labor Department review and approval.

In fact, says Kathleen Waslov, who is a senior vice president with Willis Towers Watson PLC, Boston, "There has been a surge of employers using their captives to fund stop-loss coverage."

In addition, says Marsh's Mr. Koritzinsky, there has been increased employer interest in using their captives to fund benefits provided to employees outside the United States, an arrangement that also does not require Labor Department approval.

Copyright © 2017 International Risk Management Institute, Inc.

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