Employee-benefits captives by the numbers.

In a survey of 60 companies in North America and Europe, global consulting group Towers Perrin discovered companies that are not multinational conglomerates are exploring captives for employee benefits. About 13% of the companies surveyed said they already have a captive, while 25% said they were in the process of implementing one and 35% said they expect to consider one within two to five years.

Companies in the survey with captives for employee benefits paid premiums ranging from $700,000 to $23 million annually to cover 7,500 to 65,000 employees. Half of the employers with captives in Towers Perrin's survey reported savings of up to 10%; one had savings between 10% and 20%; and two companies had savings of more than 20%. Typically, the savings come from eliminating commercial-carrier risk charges and broker commissions, higher investment returns on cash reserves, and through group purchasing of plan administration services, Towers Perrin found.

"Corporately, Columbia is a big company. Taking a several million-dollar deductible makes sense on an overall basis, but if you didn't do something to protect the smaller operating units, a $2 million loss deductible would be painful," Young said. "The captive acts as a shock-absorber protecting the smaller units from that volatility."

From a conceptual point of view, it made sense to place the LTD and workers' comp insurance funding in the captive as well, Young said.

"The concept was easy. It was the execution that was challenging," Young said. "Conceptually, the idea of putting an employee benefit risk in a captive and getting a front and having reinsurance to protect you from catastrophic risk isn't that different [from placing property/casualty risks in a captive]. But the implementation was difficult because we were charting new ground. It was also difficult to get insurers and reinsurers, the people you'd need to support the program, comfortable with it and to understand what we were doing."

To meet DOL requirements, the company first had to establish a U.S.-based branch of its offshore captive, which it was able to do after Vermont amended its captive legislation in 1998.

"The driving reason [to use the captive for employee benefits] was to reduce our claims and retain the investment income," said Jeff Grossman. vice president and controller of NiSource Inc. "It works like any other type of risk you have--you manage them all better if you consolidate them in one spot and have one group managing those risks."

Fast-Track Approach

Until the Columbia exemption, the Department of Labor, which oversees employee benefit plans under the Employee Retirement Income Security Act, had made it difficult for companies to fund employee benefits by using captives, said Sofia Tesfazion, a consultant within the global consulting group of Towers Perrin.

And until recently, winning an exemption was a time-consuming, complicated process.

Under a 1979 DOL ruling, companies that wanted to use captives to insure or reinsure employee benefits would have had to arrange the transaction so that no more than 50% of the captive's business was related to its parent. Many non-insurance companies were hesitant to take a leap that big into the risk-taking business. They weren't comfortable taking on so much third-party risk, and so captives in the United States remained mostly in the property/casualty domain, Tesfazion said.

The DOL softened its stance when it granted the exemption for Columbia, which allowed Columbia to reinsure its long-term disability program, underwritten at the time by Employers Insurance Co. of Wausau, through the Vermont branch of its Bermuda-based captive. After staying with Employers Insurance for two years, Columbia moved the program to UnumProvident and then, Prudential.

Then the DOL approved a second exemption, for Decatur, Ill.-based Archer Daniels Midland, the flour and grain company, to use its Vermont-based captive to reinsure its group life insurance benefits written by Minnesota Life Insurance Co.

In the wake of the Columbia and Archer Daniels Midland exemptions, the DOL developed a "fast-track" approval process for companies when they follow the same route that another company that's won approval already used. Under the fast-track approach, as long as the DOL requirements are met (see "Taking the Fast Lane," pg. 47) and the company uses an already granted exemption as a road map, the approval can

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Employers Insurance Co. of Wausau

A.M. Best Company # 02159

Distribution: Captive agents and independent brokers.

Unum Life Insurance Company of America (UnumProvident)

A.M. Best Company # 06256

Distribution: Independent insurance brokers and agents, benefit consultants and a direct sales force, plus corporate marketing agreements with other insurance companies, associations and financial institutions.

Prudential Insurance Company of America

A.M. Best Company # 06974

Distribution: Sales force, brokerage general agencies, brokers and other independent distribution channels.

Minnesota Life Insurance Co.

A.M. Best Company # 06724

Distribution: Career agents, consultants, independent brokers.

Metropolitan Life Insurance Co.

A.M. Best Company # 06704

Distribution: Captive agencies.

For ratings and other financial strength information about these companies, visit www.ambest.com.