How Captive Insurance Can Improve the Value of Voluntary Benefits

Of the many things employers have to focus on, scrutinizing every dollar spent on employee benefits is nobody's favorite task. Yet it's critically important as healthcare costs climb and become more complex. Chief financial officers, risk managers, and benefits professionals are desperate to identify ways to gain some control over those costs without sacrificing the quality of benefits needed to find and keep good employees.

Many company leaders make the mistake of overlooking another pool of benefit dollars that rarely attracts much attention because it's not a direct hit in the budget: The money employees themselves are spending on voluntary benefits.

Voluntary benefits such as critical illness, accident, and hospital indemnity coverage have become increasingly common as employers look for ways to soften the impact of shifting more healthcare costs to their employees. These products can protect employees from steep deductibles and other out-of-pocket expenses, especially when facing a serious illness or unexpected hospitalization. They can provide a financial cushion when employees need it most.

Unlike more conventional benefits like health coverage, employees typically pay the premiums for voluntary benefits themselves through payroll deductions. That's an important distinction employers can't afford to miss.

Voluntary benefits have traditionally operated within a fully insured structure that gives employers minimal visibility into what happens to those employee dollars. The employer may select and offer the benefit, but the insurer controls much of what happens behind the scenes. That arrangement can lead to misaligned incentives.

Supplemental health products have historically generated attractive margins for insurers and other participants in the distribution system. In some programs, a surprisingly small portion of the premium dollar may ultimately be returned to employees as benefits. But because the employers aren't paying those premiums, these plans often receive far less scrutiny than benefits appearing directly on the employer's profit and loss statement.

That doesn't mean voluntary benefits themselves are the problem. Properly designed, they can provide meaningful financial protection. Nor does it mean insurers, brokers, or consultants are necessarily doing anything unethical. The larger problem is the traditional system, in which financial incentives are rarely aligned with the interests of employers and their employees. Captive insurance companies offer a powerful opportunity to change that equation.

Risk managers are already familiar with one of the fundamental attractions of captive insurance: transparency. Instead of simply paying a premium and transferring the risk, employers gain greater visibility into claims, expenses, and the economics underlying the coverage. Applying that mindset to voluntary benefits can provide similar advantages. The insurer continues to issue the policies and satisfy the fully insured requirement, while a portion of the underlying risk and economics can be transferred into a captive.

As usual, there can be complications. The biggest is that certain supplemental health benefits are legally required to remain fully insured. Normally, that prevents employers from simply self-funding these programs, just as they might other employee benefits. Emerging captive insurance programs provide what may be the closest available alternative to self-funding, concurrent with the control, while maintaining the fully insured requirement. They also avoid the prohibited transaction typically associated with employee benefits, which prevents employers from bringing health and welfare benefits into their single-parent captive—as that requires a lengthy, arduous, and expensive legal exemption.

These emergent captive programs give employers greater visibility into how premium dollars are being used. Employers can better understand claim costs, insurer expenses, commissions, and other costs associated with the program. They gain greater control over how the benefits are designed and how remaining dollars will be used.

For a risk manager, those advantages should sound familiar: Greater transparency, greater control, and better alignment between risk and financial outcomes.

Greater control, however, shouldn't simply create another source of profit for the employer. It's vital to remember that employers have fiduciary responsibilities associated with their benefit programs. Gaining greater visibility into voluntary benefits creates an obligation to use that information responsibly. The employer needs to ensure the structure continues to operate for the benefit of plan participants.

Depending upon the benefits and their structure, that could include examining whether benefit designs reflect the health challenges employees actually experience, identifying opportunities to improve utilization, controlling excessive expenses, and finding permissible ways to reinvest favorable results into employee benefits.

For example, a common reason supplemental benefits experience low utilization is surprisingly simple: Employees forget they have them. Better integration with medical claim information can alert employees when they may have a supplemental claim, helping them receive benefits they deserve and have already paid for.

That's a fundamentally different objective from simply reducing costs. It's about increasing value. Companies offer voluntary benefits because they want to help employees manage financial risks their primary health plan may not fully cover. As healthcare costs continue shifting toward employees, that protection becomes even more important. But simply offering the benefit isn't enough.

Employers should understand whether the money their employees are contributing is delivering reasonable value. They should know how much is being paid in claims, how much is going toward expenses and compensation, and whether the program is effectively meeting employees' real-world needs. Captives can provide the transparency and control to ask and answer those questions.

Ultimately, the most important point may also be the simplest: Voluntary benefits are funded by employees. Those payroll deductions represent real dollars coming out of real household budgets. Employers that choose to offer these programs have both an opportunity to deliver valuable benefits for their most important asset and an obligation to make sure those dollars work as hard as possible for the people who earned them.

The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.