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Financing Employee Benefits via Captives Yields Favorable Returns

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Financing employee benefits via a captive provides substantial savings opportunities for multinationals, according to research data from a Multinational Pooling and Benefit Captives study. Global professional services company Towers Watson’s (NYSE, NASDAQ:TW) conducted the study, which analyzed 52 captive reports across five insurance networks and 14 research study participants.

The study showed that multinationals using a captive for financing global employee benefits yielded annual median returns of 11.3% on total plan premiums. Their annual average returns were 5.1%, with the difference between the median and mean largely attributable to the experience of one company with significant losses. With that captive excluded, the mean and median returns were very similar, and higher than those achieved under multinational pooling arrangements (6.1%).

“Annual costs for multinationals’ employee health and risk benefits are enormous,” said Gerry Winters, senior international consultant at Towers Watson. “Global benefit leaders need to manage these long-term costs if their companies are to remain competitive in the global war for talent and keep pace in their marketplaces. Captive arrangements can help them manage these costs while providing data and insights critical to effectively managing their employee benefit programs around the world.”

The study revealed wide variations in the profitability of individual contracts within captive arrangements based on geography. Guernsey policies produced the largest dividends, at 65%, followed by Japan (61%) and Germany (59%). Benefit contracts in Denmark, with average returns of -77%, were the worst performers, followed by India (-42%) and Egypt (-39%). Profitability also varied based on coverage types. Life and accident insurance contracts were the most consistently profitable, with returns of 23%. Stand-alone medical contracts were consistent deficit producers, with average returns of -2%.

“Captives are becoming an established part of the employee benefit landscape for multinationals,” said Winters. “Companies with large multinational pooling arrangements tend to have an easier transition to a captive strategy and solution, especially if they pool with a network that is also strong in captives. As our data illustrate, captives can provide an even greater opportunity for financial savings, particularly for companies with the capacity and desire to take on additional risk in employee benefits on a global basis. Captive strategy and solutions should be considered carefully: Most large to midsize multinational companies that assess this properly find they have such capacity.”

About the Survey

Towers Watson collected and analyzed pooling and captive annual reports for 2011 to 2013 and portions of 2010. The study incorporates all participating benefit plans, including life, accident, disability, medical and some retirement plans (e.g., risk-related elements such as spouse or orphan benefits). Nearly 800 annual reports were submitted by 163 multinational companies, covering $3.1 billion in premiums across 93 countries.

About Towers Watson

Towers Watson (NYSE, NASDAQ:TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com.

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