As the coronavirus pandemic spread rapidly across the globe, people, businesses, and economies alike have been facing significant disruption. Changing laws, lockdowns, and an international health crisis have changed the way that we live and work – possibly forever.
As a result, organizations have had to act swiftly to protect employees, focusing on promoting health and safety while also protecting bottom lines. Businesses have had to rethink how they deliver benefits and wellbeing initiatives, digital programmes have become increasingly important, and key market trends have shifted the strategic focus of many employers.
In fact, we have seen many multinationals make immediate changes to their insurance coverage to cope with the effects of coronavirus, and we believe it will continue to be a driver for significant and sustained developments to benefits plans around the world – even once the pandemic is contained.
How insurance programmes have responded to the pandemic
Amid the initial chaos, the focus of many multinational companies was on understanding the adequacy of coverage in place for employees and identifying any gaps that needed to be addressed. For some, this was an unwelcome reminder of how unequal employee benefit provisions are across different geographies.
Marsh & McLennan reacted quickly for our global clients to carry out this initial assessment and put in place solutions where needed. The result of this process was a globally connected, coordinated, and transparent view of insurance policies around the world.
We found that, generally speaking, most group life and disability insurance policies already provided adequate coverage for pandemics. It is relatively unusual to find exclusions in such policies, but they do exist.
On the other hand, our research showed more exclusions or gaps in medical coverage – so we worked with our clients to understand where the biggest problems might lay.
We found that the governments in most countries have stepped-up to provide and finance care associated with COVID-19, so private medical insurance coverage was unlikely to be necessary or appropriate.
Instead, we collaborated extensively with local, regional, and global insurance carriers to adjust local coverages where appropriate and to create stand-alone supplementary solutions to support affected employees and their families.
We have seen a lot of willingness and flexibility from carriers to support their clients with the wellbeing of their employees and families, often demonstrating significant flexibility on coverage and terms and conditions.
However, for many multinational organisations it has been more challenging. While global carriers have shown flexibility at a local level, they have not always coordinated their response to the pandemic internationally.
The growing role of captives in benefits programmes
There has been a renewed focus on the role captives can play in helping parent companies address inconsistencies in employee benefit coverages around the world and to provide new, innovative, and equitable benefit programs.
In a recent survey of Marsh & McLennan clients with captives, 46% say they are likely to consider adding benefits to their captives, are currently considering doing so, or are already writing employee benefits. This interest has only increased in response to the COVID-19 crisis, partly because of the insurance market’s perceived inability to provide the necessary coverage.
There is no doubt that using a captive does provide a multinational employer with a powerful tool and additional flexibility to enhance coverages and deliver an employee value proposition that underpins their business and workforce strategy. This has and will continue to be one of the key drivers for the growth in captive solutions for employee benefits.
We have worked with some of our clients in recent months to use their captives to support their business response to COVID-19. This included additional flexibility to pay claims on an ex-gratia basis that may not otherwise have been covered or to confirm their support for removing exclusions where it made sense to do so.
In many cases, given the requirement for treatment to be provided within public healthcare systems, adding coverage to private medical insurance policies would not make sense. Of course, a captive may agree to remove an exclusion but if there is no mechanism to deliver treatment in a private setting, and if there is no cost to employees, then adding such coverage to a policy is unnecessary.
However, one area where we have seen captives adding significant value is in facilitating various health and wellbeing initiatives. One good example of this is creating programs to support employees and their families with mental health. Another is implementing digital health solutions that enable delivery of primary care for employees working remotely.
Some captives have directly contributed to the cost of such initiatives, others have provided indirect support through discounting premiums in anticipation of reduced claims costs. These initiatives may not always be directly related to treating the symptoms of COVID-19, but they play a very significant role in helping organisations adapt and respond to the situation.
We also expect captives to play a role in helping to cushion some of the expected cost increases for medical insurance in the coming months. In many countries, insurers have seen a short-term reduction in medical claims as people stay at home and non-urgent procedures are postponed. However, claims costs are expected to surge as demand returns.
A new perspective on risk
As companies shift from responding to the crisis to reinventing their business model for the future, there is another aspect to be considered. Has the risk profile of employee benefits for captives been underestimated and are captives the right funding vehicle for future pandemic risks?
The traditional view would be that while captives are a useful facilitator for new and emerging types of risk coverage, they are best suited to predictable risks that the organisation is able to manage and retain.
Many employee benefits are perfectly suited to fall within this scope. When compared to other risks that captives typically participate in, employee benefit claims are often more frequent and of lower severity.
There is, however, a risk for captives that provide coverage for groups of employees in a single location – a catastrophic event such as an earthquake or terror attack could expose a captive to significant losses.
To counter this, many captives already purchase Event Excess of Loss reinsurance. But this type of reinsurance would not typically cover claims resulting from a pandemic. In fact, relatively few captives that reinsure employee benefits have purchased reinsurance that could respond to significantly increased losses due to pandemics.
Aggregate Excess of Loss reinsurance is not extensively used for employee benefits; some captives do buy it, but the terms and limits of these programs are not typically designed with severe pandemic exposures in mind. As such, we believe that most captives that underwrite employee benefits could be at risk in the event of severe pandemic losses.
Preparing for future pandemics
The coronavirus pandemic is arguably the greatest international public health crisis the modern world has ever faced. Since the first reported cases in China in December 2019, at the time of writing there have been over twenty-one million cases confirmed globally and, tragically, more than 750,000 confirmed deaths. With some countries yet to reach a peak in the outbreak and others now experiencing second waves, these numbers will continue to increase rapidly.
Despite these shocking figures, it’s important to note that relative to other historic pandemics, the mortality rates – particularly amongst the working age population that would typically be covered by captives – are quite low.
A survey conducted by our sister company Oliver Wyman in April 2020, as part of the Low Interest Rate Task Force1, indicated that most US life insurers expected a case fatality rate of 0.5%-2.5% for individuals aged 40-60 and that their group life claims overall would increase by 1%-5% due to COVID-19.
This has resulted in several multinationals reassessing their view of pandemic risk for employee benefits and what would happen if a future crisis had an even greater impact on their staff. We believe some will consider whether their captive is really able to finance such risks or if the insurance and reinsurance markets – or perhaps even governments – are better able to shoulder the burden.
Rethinking and redesigning captive solutions
We don’t think this will hold back growth in the use of captives for employee benefits, but we do believe there is a need for some organisations to first reassess their maximum loss scenarios and then review their risk appetite.
The most likely result will be a demand for more comprehensive reinsurance programs for captives that are underwriting employee benefit risks.
Very few captives, in our experience, have a reinsurance program that would respond adequately to a significantly increased number of deaths in the employee population due to a pandemic. This may have seemed like a very improbable scenario just a few months ago, but is clearly now a scenario that employers must consider more carefully.
There are also likely to be less obvious, secondary trends that could impact captives – for example, a possible increase in long term disability claims due to the negative effects that coronavirus has had on employee mental health.
Ripples throughout the insurance landscape
The pandemic must act as a wake-up call for captives to reassess risk retention and reinsurance arrangements, but the same is also true for the wider life and health reinsurance industry. Most carriers are now exploring how to reinvent their businesses and provide innovative and relevant solutions for their clients.
The stance taken by reinsurers is currently very mixed – some have reduced capacity, while others have introduced pandemic exclusions or additional premiums as part of their immediate response to COVID-19. Still others are developing solutions specifically for pandemic risks.
The previous lack of demand from captives for life and health reinsurance solutions has perhaps contributed to the shortage of bespoke products available in the market. Marsh & McLennan companies are working closely with the market to create solutions – and we have found that there is appetite, capacity, and creativity to support a greater level of engagement.
For many global companies, the COVID-19 crisis has been a catalyst to challenge the status quo. Firms have accelerated the implementation of minimum standards to make sure that benefit programs are equitable and want to provide access to basic care as already fragile public health systems come under increasing pressure.
We expect that captives will play an increasingly important role as multinationals re-design their benefits for the future.
It’s an opportunity for captives and risk managers alike to expand their influence and reinforce their value. But it’s important to remember that while a captive can be an important enabler, it is not an easy and risk-free solution to such a complex challenge.
The risk landscape has changed. We believe that better understanding of exposures combined with more tailored reinsurance solutions will be critical in ensuring that captives can assume more employee benefit risks while remaining a strong and stable partner for the future.
The Low Interest Rate Task Force was an industry-wide effort led by Oliver Wyman, LL Global, and the American Council of Life Insurers, with participation from the Society of Actuaries and Insured Retirement Institute.