It can't be stopped! The self-insurance of employee benefits
02 April 2012 | Magazine Archives FAnews & FAnuus | Employee Benefits | Herman Schoeman, Guardrisk
The self-insurance of employee benefits (EB) has gained momentum over the past decade, locally and abroad. Although the concept was initially frowned upon, its most hardened critics are finally taking notice...
Last year the South African cell captive industry, through which local employee benefit programs are typically self-insured, reported net premiums of some R3.8 billion, up 83% on the 2010 achievement. This huge premium increase points to a developing trend that requires further investigation.
"Companies are increasingly buying into the self-insurance concept because it allows them to customise their EB packages according to their organisation’s specific risk profile – and to suit their employees’ specific needs,” says Herman Schoeman, MD of Guardrisk.
What is self-insurance? Website wikipedia.org defines it as "a serious risk management technique whereby money is set aside, using actuarial and insurance information and the law of large numbers, so that the amount set aside is enough to cover a future uncertain loss.”
The practice is popular at firms where the sheer numbers of employees, say in excess of 1’000, create a large enough risk pool to predict and price the risk of losses from benefits offered. In recent times cell captive insurers have made it possible for smaller businesses to implement self-insurance programs too.
Appropriate risk ratings
Self-insurance replaces commercial insurance and is popular among companies that operate in sectors that are traditionally considered high risk. By self-insuring their EB programs these companies can base the solution on their exact risk profile and risk mitigating initiatives rather than being rated according to the sector’s pooled risks – which will often be higher. The concept works just as well for large employers, especially in the financial services industry, with their claims experience on a frequent basis being lower than their annual risk premiums.
Innovative companies will thus be rewarded for sound risk practice rather than being dragged down to the industry average. Every stakeholder emerges a winner. On the one hand employees received improved and stable benefits, and on the other, the employer reduces costs.
A staff retention tool
Employers can benefit further by implementing proactive HIV/Aids management programs, for example. Such initiatives deliver a healthier and more productive workforce, reduce the overall cost of EB programs, and enhance the company’s benefit offering to such an extent that it becomes a competitive differentiator in attracting and retaining staff.
Companies can self-insure other benefits too. Alternative risk transfer facilities are frequently used to provide for employers’ onerous post-retirement medical liabilities. This is a sensible next step in self-insurance because these liabilities – just like retirement obligations – are usually outsourced to traditional insurers. An additional motivation for this insurance path is that mortality profits can be used to subsidise the funding obligations of newly retired pensioners.
The flexibly of self-insured EB programs also means that employers are able to offer benefits over and above the traditional death, disability, medical, accident, unemployment and retirement plans.
Self-funding benefits
Retaining quality staff in an increasingly competitive market becomes easier when the company is able to think outside the box and extend the EB offering to creative options such as vacations, day care centres, scholarship funds or prepaid legal services, to name but a few. Very often the payment of these ‘additional’ benefits gets funded from underwriting profits and investment income and doesn’t cost the employer or members more.
One of the "softer” benefits of life cell captives is that they offer transparency around costs and margins. On a monthly basis cell owners are provided with accounts detailing all transactions including premiums, claims, investment income, taxes and so on.
An unstoppable trend
Captives for benefits – How to use a captive to save money and enhance benefits coverage, a 2011 whitepaper written by captive insurance experts Donald J. Riggin and Karin Landry of Spring Consulting Group in Boston, concludes that there is "significant growth potential” for the self-insurance of EB programs globally. The paper’s authors suggest that the trend towards self-insurance is one that "cannot and should not be stopped”.
Self-insurance is not for every company. The employee base must be sizable enough to sustain the practice. But for companies that qualify the significant and tangible benefits of doing so should not be ignored!
