Alternative Multinational Employee Benefits Solutions: Captives and Risk Retention
January 17, 2024
This article originally was published on Captive.com and is reprinted here with permission.
The number of organizations with international employees has been steadily climbing over the last few decades, as more businesses recognize the value in the wider talent pool offered by a diverse international workforce.
Yet establishing and effectively managing employee benefits for expat and international employees comes with challenges. In addition to basic challenges such as language barriers and cultural differences and expectations, different labor laws and regulations add new layers of complexity to an international benefits strategy. On top of that, managing the costs and risks, instituting global governance, and coping with expansion and competition for talent can put financial and operational stress on any organization.
Regardless of their workplace location, employees still expect strong benefits packages. Developing a global benefits management strategy is crucial to ensuring benefits everywhere are comprehensive and competitive enough to attract and retain top talent, as consistently as possible across company and countries, and in compliance with local regulations.
The inherent complexity of managing employee benefits across borders puts pressure on both administrative staff and financial resources, leading organizations to seek better approaches. One of the most cost-effective and flexible risk retention strategies for delivering consistent global coverage is creating a captive.
Establishing a captive to manage multinational employee benefits often involves following a path through multiple risk retention options:
Multinational pooling allows organizations with employees across the globe to consolidate and centralize the management of employee benefits across different countries and regions to achieve cost savings, improve risk management and enhance overall efficiency. The company partners with an international pooling network, then establishes a local employee benefits plan in each country where it operates. A portion of the contributions made to each local benefit plan contributes to a global fund.
Single (or stand-alone) pools are suited for organizations wanting direct control over their programs. A single company manages and finances the benefits program for the organization and its subsidiaries.
Either pooling strategy allows companies to customize plans to suit the needs of a global workforce. Spreading risk across different countries may lead to cost savings and more stable premiums. Profits in one country can be used to cover losses in other countries. In addition, the vast amount of data created through pooling can assist with cost containment and claim management, encouraging better-informed decision-making. Finally, pooling the benefits spend gives companies increased bargaining power with vendors and insurers.
Each type of benefit carries specific risks, making some better suited for pooling than others. While traditional benefits such as term life, accidental death and dismemberment, long- and short-term disability, and supplemental medical are ideally suited for the approach, more complex benefits such as workers’ compensation may involve excessive variation. Generally speaking, pooling is an effective choice when a benefit is cost-efficient when pooled across multiple countries, or if economies of scale can lead to cost savings.
Because of the nature of international employee benefits, captives are becoming a more common solution. A captive provides the coverage companies want while benefiting from any underwriting profit earned by the captive insurance company. A captive must be legally established in a domicile (a nation or state) in compliance with the laws and rules of the domicile.
The inherent nature of captives provides greater control over coverage, deductibles, payouts, and standards for employee benefits claims. That leads to lower costs, greater consistency and coordination across borders, more stable and predictable underwriting, and data offering deeper insight into programs.
Given the variety of options within the captive universe, an initial feasibility study exploring different captive solutions and the corresponding capital requirements is a critical first step. Fully realizing the benefits of a captive may take a global workforce of at least 5,000 and at least $3 million in annual premium spend. That’s why many companies may want to begin with a pooling arrangement and gradually transition to a captive. Additionally, captives must be actuarially sound to ensure their viability and compliance with the domicile.
Building a successful plan
When creating a captive, both human resources and risk managers need to be well-educated in captives and multinational pooling, with consistent open communication between HR and risk managers. Turning to consultants who can provide trusted advice for the process increases the potential for success. Specialized consultants play crucial roles in helping companies understand and use data, ensuring plans meet stakeholder needs.
Of course, the most important factor is maintaining a focus on investing in the protection of a company’s human capital. Keeping employee health and well-being central to employee benefits strategies will provide a clear focal point for all decision-making and enhance the company’s reputation as an employer.
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