Captive and Pooling, an explanation
Managing risk through a captive (see below) offers a number of benefits for employers. Specifically with respect to employee benefits, through the use of a captive arrangement, employers can gain greater control over claim reserves and investment income.
Additional key employer advantages may include:
■ Consolidation of global risk. Risk Managers are increasingly taking a
holistic view in consolidating employers’ global risks. By uniting all global
benefits through captive reinsurance, multinational pooling—or both—
global risk volatility may be smoothed and better budgeted.
■ Customized programs. Captive ownership may help employers tailor
their insurance programs to reflect their specific business needs and
changing circumstances.
■ Management of surplus. To the extent insured risks contain high margins relative to the employer’s population, captive financing may help employers control those surpluses. By combining all insurance benefit plan assets, the employer retains the investment income.
■ Tax advantages. A captive qualifies to take full advantage of tax deductions if it has sufficient risk transferring and sufficient unrelated risk. Employee benefits qualify as “unrelated business,” thereby creating a possible tax advantage for the employer.
An explanation….
Captive—an insurance company that is a wholly owned and operated subsidiary of a parent corporation whose primary business is not insurance.
Captive reinsurance—coverage provided by a licensed insurance company that is reinsured to a captive insurance company.
Multinational pooling—a cross application of experience and expenses for consolidated accounting across different insurance carriers for employees of the same firm in different countries.
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