Group captives can offer design firms flexibility, savings and control over employee benefit programs.

As small and mid-sized design firms strive to attract and retain the best talent, many realize that offering competitive employee benefits can be a critical differentiator. Yet with rising costs, maintaining these programs increasingly calls for innovative funding solutions.

As in other industries, many AEC firms are exploring captive insurance as an alternative to fund their benefits programs. Technically, captives are insurers established and owned by one or more non-insurance businesses, such as design or construction firms.

Historically, while large corporations have been able to use captive insurers for employee benefits and other risks, smaller and middle market firms now can achieve the same advantages by joining and participating in an employee benefits group captive. These entities are owned and operated by multiple non-insurance companies, primarily to insure or reinsure the risks of their member companies.

In effect, by forming a group captive, companies can collectively retain and manage risks that would otherwise be insured through traditional commercial insurance markets. This approach allows multiple companies to band together to take control of their employee benefits programs, leading to potential cost savings and increased flexibility.

Employee benefits group captives offer many advantages.

For small and mid-sized design firms, in particular participating in a group captive offers several advantages, including:

Cost savings. By self-funding certain employee benefits, companies can save significantly on insurance premiums. Captives can earn underwriting profits and investment income on premiums paid, leading to potential savings of 10 percent to 50 percent compared to traditional insurance.
Economies of scale. Group captives benefit from pooling resources and risks, which can lead to reduced costs and more favorable pricing in negotiating for stop-loss coverage, pharmacy benefit management, wellness vendors, and administrative services.
Flexibility in benefit design. Captives offer firms greater control over benefit plan designs. Individual captive owner/participants can tailor their benefits to meet the specific needs of their workforce, rather than being constrained by the terms and limits imposed by commercial insurers.
Improved cash flow. With a captive, claims are paid as they arise, improving cash flow management. This contrasts with traditional insurance, where premiums are paid upfront, regardless of when claims occur.
Exemption from state mandates. Captives can provide exemption from state-mandated benefits, allowing companies to design plans that better suit their employees’ needs.
Potential for profit. In traditional fully insured models, if your employees are healthier than expected, your insurer keeps the profit. When you use a captive, however, you keep the savings. When claims are the captive’s expectations, the underwriting gains are returned as dividends or retained to reduce future premiums. Similarly, the captive’s investment income can also be shared.

Structural elements of employee benefits group captives.

AEC firms can use group captives to fund various employee benefits, including medical stop-loss, life insurance, disability insurance, and retiree benefits. Generally, the structure, typically involves:

Assuming first layer of risk. The group captive provides a mechanism for self-funding the initial (or more predictable) layer of healthcare risks.
Purchasing stop-loss coverage. To protect against large claims, such as those arising from a catastrophic illness or injury, the captive purchases stop-loss insurance, which covers claims exceeding a certain threshold.
Managing claims. Claims are handled through the captive, which coordinates directly with third-party administrators and healthcare providers.

Assessing key considerations.

While employee benefits group captives offer numerous advantages, they also come with challenges:

Regulatory compliance. Owner/participants must navigate complex regulatory requirements, including obtaining approval from the U.S. Department of Labor for certain benefits.
Collaboration among members. Successful implementation requires strong collaboration and trust among member companies.
Initial investment. Setting up a captive requires an initial investment and a commitment to ongoing risk management and wellness initiatives.

An experienced insurance broker or benefits consultant can help firms evaluate their options and explain the requirements for participating in a captive.

Unique advantages of homogenous group captives.

AEC firms exploring the use of a group captive to fund their employee benefits might be best served by a homogenous group captive, whose owner/members are in the same or similar industries. This typically makes it easier to manage risk, share data, and collaborate on solutions.

For instance, architecture and engineering firms share several common characteristics: They generally employ white-collar professionals who work in similar environments, have comparable lifestyles and deal with similar types of stress. As a result, they may have comparable health risks and profiles, which facilitates more accurate underwriting; the development of targeted wellness programs, such as posture correction, stress reduction, and mental health; initiatives; and better predictability in claims trends.

In working with traditional insurers for employee benefits, many design firms become frustrated with the lack of transparency with respect to their claims data and cost drivers. However, by participating in a group captive they gain full transparency into how their healthcare dollars are being spent, as well as the ability to collaborate with all other member/owners to set the rules for all participants. They also gain the control to tailor benefit strategies specifically to the unique needs and interests of their workforces.

In a homogenous group captive, design firms may also benefit by sharing best practices for employee well-being, collaborating on compliance strategies (such as with respect to ERISA and ACA) and designing employee engagement strategies that resonate with their distinctive company cultures and professional and staff employees.

Finally, participation in a homogenous group captive enhances the potential for continuous improvement. Member/owners may be able to share best practices and conduct meaningful benchmarking against peer companies.

While homogeneous group employee benefits captives offer several exciting advantages for AEC firms, they typically require long-term commitments, careful planning and collaboration to navigate the regulatory landscape and to ensure ongoing success. However, by taking control of their benefits programs, design firms can meet the needs of their employees, while achieving cost savings, flexibility, and improved cash flow.

Justin Gough, vice president of Employee Benefits, Ames & Gough. He can be reached at jgough@amesgough.com.

Search results

Surveys & Reports

Learning & Events

Posts