The main priority for two thirds of the group that have implemented a captive vehicle is to save cost on employee benefits

Over the past decade the number of captives that have implemented employee benefits worldwide has increased nearly 10-fold, from 9 in 2004 to 77 today. The vast majority of companies choosing to implement such a financing vehicle have done so in order to save significant costs on their employee benefits bill, according to research by Towers Watson’s specialist forum, called the Captive User Group.

Towers Watson polled over half the employee benefit captives operating globally on their current use of captive vehicles and how they anticipate this will change in the next five years. The main priority for two thirds (67%) of the group that have implemented a captive vehicle is to save cost on employee benefits and other financial benefits. A further 24% claimed their impetus was to control and improve their claims data, which in turn would help proactively manage benefit costs.

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Mark Cook, 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.

Nearly two thirds (62%) of those questioned use their captive for death and disability benefits and medical insurance, while a handful (11%) also include defined benefit retirement savings as well. In the future, nearly half the captive users (48%) are also considering a captive pension transaction, either in the next 3-5 years (36%) or within the next 12 months (13%).

Mark Cook continued, “The breadth and depth of captive use continues to expand as more companies realise the potential to mitigate the ever spiralling 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,” said Cook.

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