Internationally, self-insuring employee benefits is not for the faint hearted

- Herman Schoeman, MD of Guardrisk

Businesses in all sectors, in all countries, share the common goal of growing revenue but, as this becomes increasingly difficult to do, there is a global groundswell of increasing pressure to cut costs. This means that more and more, the boundaries between companies' HR, finance and risk management divisions' goals are blurring; and, with cost reduction firmly entrenched as business's universal Holy Grail, cost reduction programmes often extend across these three divisions. Not surprisingly, within this kind of scenario, the concept of self-insuring employee benefits through alterative risk transfer (ART) vehicles is internationally on the increase - this despite prohibitive regulatory requirements in the US, the world's acknowledged ART trend setter .

While captives have been around for more than 30 years in the international market, the notion of using captives for financing employee benefits has breathed new life into the self-insurance concept. In 2004 global consulting group, Towers Perrin, surveyed Fortune 500 multinational companies in 10 different industry sectors throughout North America and Europe. They found that 13% of respondents had already implemented a captive to insure their employee benefits; 25% were in the process of considering implementing a captive; and a further 35% would consider looking at captive involvement within 2 - 5 years.

While the main reason for self-insuring employee benefits is to save costs, there are other "softer" but no less compelling reasons, not least of which is the ability to create a unique package, especially for difficult-to-insure benefits. Other reasons include: improved underwriting flexibility; better central coordination; improved data management and the improvement of claims ratio.

But self-insuring employee benefits is not for the feint hearted: delegates at the recent the World Captive and Alternative Risk Financing Forum held in the US bemoaned the fact that obtaining the necessary licence to self-insure employee benefits is a lengthy - it can take up to a year to prepare the necessary documentation - and expensive process.

US regulators recognize the potential of the concept of self-insurance of employee benefits but are treading cautiously. Each and every life ART programme is considered by the state regulator on a case-by-case basis. Detailed business plans must be submitted, together with letters of reinsurance terms and financial projections, and the use of a fronting insurer ? that holds a Standard and Poor financial strength "A" rating is mandatory. The fronting insurer cedes the business to the captive ? sometimes the ART vehicle elects to accept less than 100% of the risk, which can then be retroceded to the fronting insurer or reinsured to a professional life reinsurer. The fee to use the fronting insurer's license is high; typically in the region of $200000. The high cost, combined with the lengthy set up period, means that self-insurance of employee benefits is only viable for large companies with a number of international offices, and more than 10000 employees.

Another factor that has inhibited the extent of self-insurance of employee benefits internationally is that a condition of the regulator's approval is that employers are required to improve the benefit plans within the new structure, which often results in lengthy negotiations with staff members.

Locally, it's far easier - and quicker - for companies to self-insure employee benefits. It takes about 90 days for the application and implementation of an ART programme for employee benefits and is a viable prospect for companies with more than 1000 employees - only 10% of the international benchmark. Thus it is not surprising that the local ART market for employee benefits has show significant growth in recent years (all the major life insurers now offer ART facilities) and this trend is expected to continue.

While the international market has been slower to take up the concept of self-insuring employee benefits, there is no doubt that this trend will turn around as regulators come to experience and appreciate the benefits of the concept.

For further information please contact: Issued by:

Herman Schoeman, MD of Guardrisk Melanie Davis, PR@Work

Telephone: +27 11 669-1001 Telephone: +27 11 615-3309 / +27 83 225 7450