Over the past decade, the use of captives to underwrite an ever-increasing range of risks has grown considerably. Clive Hassett assesses how to approach using a captive for your business travel insurance programme
Where once captives were the exclusive preserve of the largest multinational companies, today many businesses are either using or considering using one, attracted by the many perceived benefits they offer. This growth comes despite soft market conditions prevailing across many lines of insurance that are keeping premium costs low and coverage broad. In this article, we explore the reasons behind the increased popularity of captives, and assess the pros and cons of using a captive to underwrite business travel insurance programmes.
Captives are increasing in popularity
It is no surprise that captives are being considered by a wider range of companies, and for a greater range of risks. Run well, they can offer a flexible and cost-effective risk management option. In addition, Solvency II comes into force in 2016. This will impose a greater regulatory and capital burden on effected captives, but will also give credit for risk diversification: hence, companies will be examining what other classes of business their captives could underwrite.
In 2014, Marsh’s Captive Benchmarking Report1 found that small captives, created by mid-sized companies with less than $1.2 million in premium (‘micro captives’), were the most popular type of new captive in the US. These companies are increasingly using their captives to cover a range of new risks including voluntary employee benefits, critical illness, medical stop loss, identity theft, pet insurance, trade credit, group home, auto and umbrella covers. This trend is likely to increase, as despite some focused attention from the American Internal Revenue Service (IRS) on ‘micro captives’, where the primary aim appears to be tax management rather than risk management, the US has passed legislation, effective 2017, that raises the premium threshold for these 831(b) captives to $2.2 million.
accommodating local regulatory and business user requirements as part of a consistent global programme adds a significant further layer of complexity to the establishment of a business travel captive
Against this backdrop, it is a logical expectation that increasing numbers of business travel programmes could also be underwritten by captives in the future. Our experience certainly points to a continued growth of global business travel programmes that we write for multinational companies with numbers increasing by a factor of 20 between 2012 and 2015, although the vast majority of these programmes are still full risk transfer without captive involvement.
Pros and cons
The high service requirement of today’s business travel policies combined with the significant investment of time and finance required to establish a new captive make it highly unlikely that it would be worthwhile or financially viable to set up a new captive from scratch exclusively for this line of business. However, although the use of captives for business travel insurance programmes is currently limited, there is a definite uptick in interest from clients wanting to explore the option. For companies that already have a captive in place that is currently underwriting a broad range of business lines within the captive then business travel may well be an additional programme worth exploring.
Establishing a captive is not an exercise to be undertaken lightly, however. Start-up costs are high, management requirements are onerous; and for these reasons captives are not a short-term or opportunistic option. For a business travel programme in particular, a company would need to give careful consideration to whether it could provide the level of service on a global scale, inherent in their existing business travel insurance programme – assuming the programme is provided by a quality global insurer. By their very nature, business travel policies tend to have a high volume of small claims, which means any company establishing a captive would also need to invest in a sizeable and experienced claims handling team. In addition to the volume of claims, there are the accident and healthcare challenges ranging from complicated medical evacuations to more routine injuries and accidents, all of which need to be supplied globally and at consistent levels of service.
Profitability is another important aspect to consider. Business travel premiums tend to be very competitively priced, whilst still offering a high level of benefit. Companies would need to give careful thought as to whether the captive could make a satisfactory underwriting profit and return on capital for this class of business.
it will be essential to have the right experience within the captive to manage a global travel programme compliantly
The multinational aspect of business travel cover is another key concern. Captives tend to work best when global coverages are aligned, and the captive is able to take a consistent approach to understanding and underwriting risk. There are many variations, however, in how business travel policies operate and are regulated around the world, and it is a challenge to homogenise them to the point where the underwriting and risk management is stable and consistent. In many instances, local regulations will require cover to be provided by local admitted carriers. Subsidiary companies may have existing local policies in place, which provide cost-effective and wide cover. So, accommodating local regulatory and business user requirements as part of a consistent global programme adds a significant further layer of complexity to the establishment of a business travel captive. For these reasons, it is of critical importance that a company selects an insurer and broker that have very strong global capabilities and a track record of providing international business travel programmes.
Another issue to consider is that often the control and purchase of business travel programmes does not sit with the risk management team. Instead, the purchase of business travel cover is frequently aligned to human resources (HR). In our experience, it is unlikely that HR professionals will have significant experience of working with a captive or dealing with international insurance programmes, so they will require training and guidance from the risk manager, broker and insurer. As such, the establishment of a captive would require a high level of internal education and ‘sell-in’.
Questions you should ask
Before contemplating using a captive for business travel insurance programmes, there are a number of considerations that require careful consideration:
- Is your existing captive vehicle used for genuine risk transfer purposes or is it primarily an instrument to aid financial and fiscal planning? If a business travel policy is to work within a captive, the captive owner will need to act and think like an insurance company manager when developing their captive strategy, rather than as a purchaser of insurance. If this mindset is not established from the outset, the captive is unlikely to deliver the required cover, service and financial result.
- Does the business generate sufficient business travel premium to make the establishment of a captive economic? Business travel premiums are very low, and even large companies might find that local premium levels in many countries where cover is required are below the level required to generate sufficient premium income and to build reserves. Bear in mind that the frictional costs of insurer fronting and captive management charges will also erode net revenue to the captive. If this is the case, it is hard to make a strong economic case for the establishment of a captive exclusively for business travel coverage. If, on the other hand, there is sufficient premium and there is a clear underwriting motive and anticipated profitability, then a captive could give the organisation strong control over an important part of its travel budget.
- Do you have the expertise in-house to run a captive compliantly and efficiently? It will be essential to have the right experience within the captive to manage a global travel programme compliantly, adopting the appropriate combination of local and global cover to ensure that policies are effective and claims are settled promptly and appropriately. If individual business travel cover is only bought in a home country, then the purchase of a business travel programme is relatively simple, and can even be purchased via an online distribution system. If, however, the coverage required is for a multi-country programme, the difference in regulations in every country need to be considered. In addition, business travel insurance can also cover the families of employees, and consumer protection and duty of care regulations apply, creating a further layer of complexity and responsibility.
- Is your business able to provide the high levels of local support now inherent in all good business travel cover? All good, comprehensive business travel programmes will provide first-class on-the-ground support services to assist employees when travelling. These will include medical assistance, evacuation services and even luggage replacement. Global insurers today also offer technology linked ‘dash boards’ that enable HR departments to monitor which territory an employee is in, at any point in time, at the click of a mouse. Employees can then be kept informed as necessary regarding any essential or fast-changing travel information and advice.
Choosing a captive partner
Once all the options have been carefully researched and considered, and a captive is deemed a possible option for effective and efficient risk transfer, then the next step is to find an insurance partner to front the programme. The first year of managing the captive is likely to be very challenging, and you will require an insurer with absolute commitment to service delivery who can work with you to iron out the inevitable ‘teething problems’ over the next two to three renewals to make the captive more effective and better embedded within the business.
If a business travel policy is to work within a captive, the captive owner will need to act and think like an insurance company manager when developing their captive strategy
It is important not to be tempted by the cheapest price on offer, even if the economic case for establishing a business travel captive programme is finely balanced. Equally important is that the choice of partner is based on a demonstrable track record of running a global programme, backed up with a global network of staffed offices that can interact and advise local subsidiaries and that have strong claims assessment and payment capabilities and experience. Your partner insurance carrier needs to be able to demonstrate service performance against key performance indicator standards, and should be able to provide client references to demonstrate this capability. Carriers must also be able to demonstrate familiarity of working with third-party assistance firms, who will need to be engaged to provide the on-the-ground services required.
Given the complexity and investment of time required to get a captive running effectively, it is particularly important that you select an insurance partner that you can work with for the long term. Because of the claims frequency and the challenges of running a global business travel programme, which surpass those of most other classes of business, changing the partner on a business travel programme would be very disruptive and not something to be undertaken lightly.
Another aspect to consider is that often the people who will use the cover most will be key business producers and senior management. This means that the quality of business travel cover will be placed under close scrutiny, placing even greater pressure on providing the right service, at the right time and in the right place.
When a captive could be a viable option
It should be evident from this analysis that business travel insurance programmes are not ideally suited to a dedicated captive, as in most instances it would not be financially viable. However, this does not mean that the use of captives will always be inappropriate. In our view, if there is a captive already underwriting a broad range of other risks, and the scale of your business travel programme is sufficient to generate adequate premium revenue and profitability, then incorporating business travel within a multi-line captive that has strong management and administrative capabilities can and does work positively for organisations.
Perhaps the most pragmatic approach is to work with a suitable global insurer and establish an optimised and effective risk transfer business travel programme that really works for your organisation. Over time, you can decide whether it is worth involving a captive or if it makes more sense to stay in a partial or full risk transfer arrangement.
1 Marsh – 2014 Captive Benchmarking Report - https://www.marsh.com/us/insights/2014-captive-benchmarking-report-evolu...