Companies finally have a regulatory blueprint for how to use their captive insurer to fund benefits programs. Now the question is, how many will take advantage of it?
Last November, International Paper became the first company to receive "fast-track" approval from the Department of Labor to fund its group life benefits through its existing property/casualty captive.
Under the new process, if a company satisfactorily copies precedents set in two previous cases — one involving Columbia Energy Group and the other Archer Daniels Midland — it can receive DoL approval within 75 days. IP hired a highly rated primary insurer, Metropolitan Life Insurance Co., as well as an independent fiduciary, U.S. Trust Co., and improved its benefits package to gain the DoL's blessing.
Having the fast-track process, says Rich Fuerstenberg, a consultant with Mercer Health and Benefit Services, paves the way for firms to realize the promise of captives, which includes a better spread of risk as well as possible tax savings. Previously, he notes, the DoL effectively prohibited such funding.
To qualify, he explains, a firm had to allow no more than 50 percent of its business to be related to itself, and since "typically a captive is for insuring related risk," that was nearly impossible. Moreover, the DoL was wary of a company being both the owner of the captive and the fiduciary of the assets — a scenario that was viewed as "the fox guarding the henhouse," adds Fuerstenberg.
Now that the fast track is in place, many consultants report an increase in firms requesting feasibility studies, says Karin Landry, managing partner at Spring Consulting Group LLC in Boston. "While companies can look at funding any benefits out of its captive," she explains, "some, such as life insurance and disability insurance, are more conducive [to the process] than others." Sorting through what works and what doesn't takes time, she adds, noting that there are already a number of companies following IP's lead.
Mercer Human Resource Consulting's Paul Shimer adds that firms must also weigh the "added costs built into the ruling." For example, there are costs associated with extending benefits that are reinsured to the captive, as well as with hiring a third-party fiduciary. In addition, if a firm doesn't already have a domestic captive set up, say in Hawaii or Vermont, it cannot qualify for fast-track approval.