An October 8th report from global professional services company Towers Watson highlights the trend toward large U.S. firms creating “captives”, that is, financing vehicles designed to reduce their employee benefits costs. The reasons for this trend are obvious, as constantly increasing employee benefits costs (especially health care) have been eating into corporate profits for some time.

Employee benefits Captives

2015 Towers Watson “Captives” survey

Towers Watson undertook a survey of 41 of the 77 employee benefit captives operating globally regarding their use of captive vehicles, and their plans for developing captives over the next five years. For 67% of the group the primary goal of their captive vehicle is to save costs on employee benefits and other financial benefits. Another 24% claimed the primary goal behind their vehicle was to control and improve their claims data, leading to an ability to more effectively manage benefit costs.

Around 62% of those surveyed use their captive for death and disability benefits and medical insurance, while an additional 11% include defined benefit retirement savings. Nearly half of the firms with captives (48%) are also considering launching a captive pension in the future, either in the next 3-5 years (36%) or within the next 12 months (13%).

Employee benefits Captives

Statement from TW Director Mark Cook

Mark Cook, a director at Towers Watson said, “With the growth in employee benefits and large increase in costs for many types of benefits, companies have been prompted to set up their own captive frameworks to help keep their costs down to sustainable levels. Sometimes there will be no solution available from the external market, sometimes the costs from traditional insurers will be too high, but cost containment is always at the heart of any captive decision.”

Cook went on to note, “The breadth and depth of captive use continues to expand as more companies realize the potential to mitigate the ever spiraling costs of employee benefits. Companies with a desire to take on additional risk can reap the biggest benefits but careful assessment is vital before launching into any kind of self-insurance as only strong, well-managed captives succeed.

While cost savings are a clear motivation behind setting up a captive in the first place, Towers Watson’s 2014 Multinational Pooling and Captives research study revealed that the success of individual captives varies significantly. While the median annual return for global employee benefit captives was just over 11% on total plan premiums, there was a wide disparity in the profitability of individual captives with the most successful yielding 65% returns while the lowest performing were left with a -77% deficit.”