Increasingly, multinational companies are using captives to not only finance insured employee benefits (EB), but also bring a greater degree of control on costs, and insight on claims patterns. This is a trend that has been increasing for the last 10-15 years, and one that continues to accelerate, with more EB captives in use now than ever before.
A more recent trend in EB captives is to see them as a tool to support and accelerate the diversity, equity and inclusion (DEI) objectives of multinationals. DEI is an increasingly clear business imperative, with attention and focus at the Board level and, for some multinationals, achieving DEI objectives is becoming the main rationale for using/setting up an EB captive.
How can an EB captive support your organisation in bringing your DEI objectives to life? Below, we summarise how.
A captive is a subsidiary of a multinational company that is set up to retain the risk of the multinational group within an insurance structure. In short, it retains insured risk that would otherwise be externalized to an insurer.
There are many reasons for doing this, but one major rationale is the increased control that the multinational has over its insured risks. In turn, this allows the multinational to influence the terms that the risks are covered under, since the risk is ultimately retained on the multinational’s balance sheet and not on an insurer’s balance sheet.
Under a captive structure, the multinational also determines the price of the risk (the premium paid) within certain parameters. This enables the company to decide whether, or how, to price changes to the terms of benefits that are being included in the captive structure.
The use of captives to support DEI objectives focuses primarily on the concept of inclusive benefits. In some markets, for certain benefits, there are common exclusions that disproportionately impact certain employee groups more than others (e.g., HIV, suicide, age-restrictions). Similarly, in some markets it is typical for dependents to be defined in a limited and narrow way that means certain family structures (e.g., same-sex partners, non-adopted children of partners) are not eligible for dependent cover.
Given the control that the EB captive structure gives the multinational, in many cases the company can decide to remove these exclusions, or to expand definitions of eligibility, to eliminate these non-inclusive practices.
Captives can also help facilitate improvements in the benefits offered under group medical plans. For example, annual limits can be increased. Further, benefits not typically offered in the local markets can be added to the medical plan for the benefit of the employee, for example, trans health benefits.
EB captive structures predominantly work with one or multiple captive networks, global networks of insurers that provide the structure, administration, and cash transfer of the EB insurances to enable the EB captive to function. These networks work with local insurance partners to provide the insurance structure.
To alter the terms, or the eligibility, of the employee benefits, the local insurance partners need to adapt their insurance contracts with the multinational’s local business entity (e.g., to remove a suicide exclusion, or to expand spouse definition to include unmarried partners). However, in a purely insured situation (without a captive), a local insurer may refuse to adjust terms for any reason — it may not be market practice, the insurer may believe the risk to be too high, or even simply because the insurer doesn’t know how to price it. When the multinational retains the risk (and determines price), the ultimate decision rests with them, and the insurer’s role is only to administer the terms.
In this way, the captive structure enables DEI solutions that would not be otherwise possible — either because insurers would not agree to change terms, or because they would make the cost of the changes prohibitively expensive. As with any multinational’s corporate strategy, there may be some limitations, particularly around local regulatory or legislative environments. For example, in some markets, it may not be possible to define a dependent as a same sex partner due to homosexuality being illegal in that country.
There are growing numbers of multinationals using either existing captives, or looking to set up a new captive, to realise the benefits of such a structure for their corporate DEI objectives. In one such example, a newly implemented EB captive progressed its DEI objectives in two phases.
