Rising Number of Companies ConsiderING Alternative Financing for Employee Benefits

Towers Perrin Survey Finds That Employers With an Employee Benefit Captive are Realizing Cost Savings of More Than 20%

Stamford, CT., February 26, 2004 � Large employers with global workforces can realize significant cost savings by using captive insurance companies to finance employee benefit programs, according to a groundbreaking survey by Towers Perrin.

The Use of Captives for Employee Benefits survey reveals an emerging trend as companies worldwide seek to contain employee benefit costs by using captive insurance companies. A captive is a wholly owned insurance subsidiary that, like any insurer, provides underwriting and pricing, claims handling, accounting and administration. Of the 60 companies that completed the survey, 13% of respondents already use their captive for employee benefits and 25% are currently considering implementing a captive solution. Further, 35% of respondents are considering captive involvement within the next two to five years.

Survey respondents were also asked to rank the three most important reasons for using captives for employee benefits. Cost savings and improved cash flow ranked most often as the number one and two reasons, respectively. Also high in the rankings was the ability to tailor benefit coverage and centralize coordination of benefit programs.

“Cost savings are achieved by reduction or elimination of external insurance company risk charges and brokers’ commissions, higher investment returns in certain cases and through economies of scale by group purchasing of administration or service. We expect the interest in captives to grow even more as organizations continue to face cost pressures,” said Sofia Tesfazion, a Towers Perrin consultant in its HR Services business. Of those companies surveyed that already have an employee benefit captive, 33% report that the captive has achieved cost savings of more than 20%. “Notably, employers that use captives to finance employee benefits enjoy greater control over these program costs and have direct access to all relevant financial information that can further enhance cost control,” Tesfazion continued.

Captives More Attractive as Restrictions Ease

Tesfazion also points out that recent rulings by the U.S. Department of Labor (DOL) are easing restrictions on a company’s use of a captive for risk exposure to include employee benefit plans. “Within the past year, two large employers petitioned the DOL for exemptions from prohibited transaction rules under ERISA. Those exemptions relate to using captives to provide group term life insurance and long-term disability benefits,” Tesfazion explained. “The DOL granted the exemptions, which in turn is spurring other companies to take advantage of the rulings in using their captives for employee benefits.”

Challenges Remain

In addition to revealing the benefits associated with captives, the study also shows that there are challenges. Chief among those challenges is the lack of experience within an organization. “Risk management departments usually don’t deal with employee benefits, and HR professionals are often not exposed to risk management techniques and captive strategy,” said Tesfazion. “This can lead to internal conflict when pursuing a captive strategy for employee benefits.”

In 2003, Cadbury Schweppes, the beverage and confectionery giant, faced some of these challenges as it established a captive for employee benefits. “Actually implementing a captive insurance program can be very challenging, as it usually introduces a whole new way of working together between the center and the country units as well as among the risk, financing and HR functions. A successful partnership, however, will lead to important financial benefits for a company as well as enable more informed decision making on employee benefit plans and liabilities,” said Karel Leeflang, Cadbury Schweppes’ International Rewards Director.

Towers Perrin assisted Cadbury throughout the process of establishing the captive. “We conducted a feasibility study, financial analysis, assisted in the selection of countries and fronting network as well as supported parts of the implementation,” Tesfazion added.

About the Survey

The Use of Captives for Employee Benefits survey was conducted in late 2003 and the questionnaire targeted Fortune 500 multinational companies in 10 industries throughout North America and Europe. Of company representatives completing the survey, 50% hold positions in risk management, 17% in finance and 31% of respondents were HR professionals. Towers Perrin’s Global Consulting Group advises multinational organizations on all aspects of benefit strategy, benefit plan design and financing.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations around the world improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting and administration services that help organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm’s other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together, these businesses have over 8,000 employees and 78 offices in 76 cities in 24 countries. More information about HR Services is available at www.towersperrin.com/hrservices.