Return of the Company Store

How can companies rein in escalating benefits costs? Get in on the action.

A lot of companies are asking the same question. The average employee share of premiums for individual coverage jumped 27 percent last year (to $454 annually), according to a Kaiser Family Foundation study. And for the first time in four years, more workers in the survey experienced benefit cuts than benefit hikes.

By allowing vendors to directly flog financial products to employees, some corporate executives may be hoping to camouflage the drop in company-provided benefits. And when those voluntary benefits purchases come directly from payroll deductions, some employees may barely notice they’re paying more money for the same level of protection.

A Comfortable Sort of Risk

While some companies are trying to rein in benefits cost by cutting back on coverage, others are taking a slightly different tack: They’re getting in on the action.

Executives at NiSource Inc., for example, have used the company’s captive insurance unit to help keep long-term-disability premiums stable in a rising market.

It’s a nifty plan. With the captive reinsuring a substantial chunk of the risk covered by UnumProvident, NiSource’s LTD insurer, the corporation gets back some of the premium dollars it might otherwise have forked over to insurers. The captive can earn investment income on the premiums it collects. In a good underwriting year, NiSource can even turn a little profit on the business, says Timothy Bucci, the company’s director of risk management and insurance. That money then goes toward cutting down on NiSource’s benefit costs.

Aside from cost-cutting, experts say the big lure of using a captive to underwrite employee-benefit risk is the chance to lower taxes. For a company to qualify for a federal tax deduction on the premiums it pays to its captive, however, the captive must do as much as 50 percent of its business in risks unrelated to the parent corporation, explains Thomas Jones, a partner at law firm of McDermott, Will, and Emery.

There are other ways for a captive to get up to the half-way mark than reinsuring health and life insurance benefits, however. Sheila Small, the assistant treasurer for risk management and insurance at Verizon Communications, for instance, has added sizable amounts of non-related business to one of the company’s captives by putting together a program that offers discounted auto and homeowners insurance and other personal-lines coverages to employees. Under the program, which the company has branded “Verizon Advantage,” employees can get quotes over a 1-800 line from three different insurers—Liberty Mutual, Metlife, and Travelers—and pay for it via payroll deduction.

The voluntary benefits provide Verizon’s captive with a tidy piece of unrelated business. After agreeing to reinsure a portion of the auto or homeowners coverage, the captive gets paid a certain amount per insured, minus an administrative fee. The captive can profit on amounts left over after claims are paid, according to Small. And auto and homeowners tend to be profitable lines of insurance, since carriers of such coverage don’t often provide it if they don’t get adequate rates, she observes.

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