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Expanding captives to benefits.

Many big companies at least once face the pleasant quandary of what to do with surplus cash after the liabilities and assets have been offset on their balance sheets. According to D. Hugh Rosenbaum, a principal with Tillinghast, some should consider funneling that cash into employee benefit captives.

Generally speaking, such captives are not as well known as property/casualty captives as a haven for surplus reserves. One reason Might be that risk managers have traditionally handled captive research and organization for their companies as opposed to benefit managers. However, employee benefit captives present an enticing alternative to the commercial insurance market. There are currently 2,040 single-owner captives and 945 group-owned captives extant, according to Mr. Rosenbaum. "In 1989 premiums for these captives totaled $9.5 billion, with a capital base of $10 billion and assets amounting to $17 billion," he said.

Life Insurance Ideal

Mr. Rosenbaum said life insurance is ideal for a captive because it is a money-maker, easy to write and very predictable from an experience rating perspective. However, he added that disability insurance should not be overlooked. "Disability has a lot of income buildup,,, he said, "and it surprises me that there aren't more straight disability plans insured in captives. Perhaps disability plans are looked on as being in a deficit position while group life plans are considered to be in a profit position."

Mr. Rosenbaum added that health insurance is usually considered short-tail and not a good prospect for a captive. However, he said excess medical lines with individual cases beyond the $100,000 range are good captive candidates because they are often overcharged or charged separately. "In the United States there is some activity in the form of offsetting the liability of postretirement medical benefits with captives," he said. "But it is important to remember that currently you can only reinsure employee benefits in the U.S.; you can't write them directly into a captive. Only in the U.S. Virgin Islands can you write direct employee benefit captive business, and the legislation there is horrendously complicated."

Activity in Europe

Europe's employee benefit captive market is more open to writing direct business, particularly in Sweden and the United Kingdom where captives insure private medical benefits and farm out administrative services to private providers. According to J. Brady Young, a consultant with Tillinghast, a key development was the passage of the Second Non-Life Insurance Directive which allows companies to buy insurance on a pan-European basis and write directly in countries where they are not domiciled.

"American companies will have a vehicle to write direct business if they have licensed captives in the U.K., Dublin or Luxembourg," Mr. Young said. "The major domiciles used by European companies are Guernsey with 150 captives, Bermuda with 160, the Isle of Man with 90, Luxembourg with 75 and Ireland with 15."

According to Mr. Young, European captives are "alive and well with some innovative and creative ideas." As to the question, Would the European Economic Community want to serve as domicile for American employee benefit captives? "The answer is yes," Mr. Young said, "but only if the business is on a long-term basis."
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

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Title Annotation:employee benefit captives
Author:Johnson, Tom
Publication:Risk Management
Date:Jun 1, 1990
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