Captive insurers as employee benefit risk funding vehicles

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In the last 30 years there has been a significant, if uneven, growth in the practice of using captive insurance companies as employee benefit risk funding vehicles. This was due to the corporate need to reduce insurance costs in more difficult economic conditions, but also to obtain financing capacity for ‘uninsurable’ benefit risk, a problem compounded by the events of September 2001. The use of captive insurers for benefit funding has been impeded by tax and legal constraints in certain jurisdictions, particularly in the USA. This situation has now changed as a result of a more ‘liberal’ application of US tax and employment law and this may encourage the wider use of captives to fund benefit risks.This paper attempts to give a historical perspective to the role of captives in employee benefit risk financing. It examines the notion of corporate risk, implicit in risk management objectives and employee benefit risk cost, as well as what is entailed in maintaining a captive as a viable profit centre. It presents a case history of a benefit risk transfer to a captive and offers some tentative conclusions about the future role of captives in funding benefit risks.