Employee Benefit Scheme Financing

However, with the ever increasing costs of medical services and policy and claims administration in Asia, attendant financial exposure for many organisations is becoming increasingly significant.

The traditional means of financing is via insurance, which not only fixes the annual cost of employee benefits but also transfers their administration to an insurance company.

This represents a perfectly reasonable solution for small employers. However, larger organisations with 1,000 or more employees can make valuable savings by adopting a primarily non-insurance approach. Their ability to do so stems from the volume and spread of risk in their exposure base, which makes a proportion of their employee benefits predictable in terms of annual cost. Given that the objective of insurance is to replace an unpredictable cost with a fixed insurance premium, it follows that the predictable element of employee benefits costs does not need to be insured. Larger employers especially in the more developed markets are increasingly taking a non-insurance approach.

The steps involved in a primarily non-insurance approach are:

1. The employer pays medical expenses and other benefits from its resources. It might use an employee benefits trust or other structure within the process, depending on local requirements.
2. The employer purchases “specific and aggregate excess” insurance. This covers the non-predictable element of its employee benefits exposure, such as infrequent and expensive medical conditions and accidents. Hence, the employer enjoys materially the same certainty of annual cost that conventional insurance delivers. The amount of specific and aggregate excess insurance required depends on the volume and spread of risk involved. Generally speaking, the larger the employee base, the more predictable it becomes and the less insurance is required.
3. The employer engages a “Third Party Administrator” to handle the program on a day-to-day basis, providing all of the “front-end” services normally undertaken by the insurer (such as employee enrollment and liaison and claims handling). Hence, from the employee’s perspective, there is no material difference between the insurance and non-insurance approaches.

The savings and other advantages achieved by the above apply to the retained element of the program, i.e. 1 above, and include the following:

1. No insurance premium tax is due;
2. No brokerage is incurred;
3. The underwriting profits and administration costs normally built into insurance premiums are recaptured;
4. Payroll taxes applicable to (a), (b) and (c) above are saved;
5. By paying employee benefits only when claims are incurred rather than when premiums are due, the employer conserves cash and generates extra investment income;
6. The employer can increase savings over time as well as improve the health of its employee base by promoting wellness and other health risk management initiatives;
7. The employer can choose the scope of benefits to provide;
8. The taxable benefit to the employee is reduced with no reduction in protection.
9. The above savings are partially offset by Third Party Administrator costs and a greater commitment of management time. Nonetheless, the net savings can be very considerable, especially for larger employers operating in high-tax domiciles.

Assistance from RACSAP

RACSAP can provide a systematic, independent and logical process to assess the extent to which any one employer can benefit from using the above approach. This would begin with an analysis of:

• Its exposure base;
• The benefits levels it wishes to offer;
• Local taxes and regulations;
• Other relevant issues, such as the employer’s financial, cash flow, tax and other circumstances.

The key determinant is the level of risk that the employer can retain without this affecting financial stability. As noted above, generally speaking, the larger the exposure base, the greater the potential savings.

Using the above information, RACASP can, on a “Total Cost of Risk” basis:

• Design an optimum employee benefits structure, identifying the exposures to be retained and those to be transferred;
• Recommend the optimum means of risk retention, be it an employee benefits trust, a captive insurance company, an internal fund or otherwise;
• Recommend the optimum means of risk transfer, perhaps via a broker or insurer tender process;
• Recommend the optimum means of program administration, so the employee receives the same or better service that would be provided by an insurer, and the employer has as much or as little administration involvement as it would like. As noted earlier, this would normally involve the use of a Third Party Administrator;
• Assemble a risk management and employee wellness program to promote employee wellbeing and manage claims and attendant costs down over time;
• Assemble a program reporting and management process to monitor its performance, ensure proper referral and management of large claims, calculate ultimate claims estimates, keep abreast of financing requirements and generally ensure that the program operates at maximum efficiency and cost-effectiveness.