Alcoa uses captive to fund workers' personal lines risk

Posted On: Jul. 16, 2006 6:00 AM CST
Jerry Geisel

PITTSBURGH—The sponsor of one of Vermont's oldest and largest single-parent captives is broadening the captive's book of business to fund personal lines coverage for employees and retirees.

Pittsburgh-based Alcoa Inc. is using the captive to reinsure automobile, homeowners, and umbrella policies that employees and retirees purchase from units of Liberty Mutual Group Inc., MetLife Inc. and The St. Paul Travelers Cos.

The captive, Three Rivers Insurance Co., will reinsure up to 50% of the risk. Three Rivers, which was licensed in Vermont in 1983, has become one of the state's largest single-parent captives, with about $87 million in premium volume.

John Wilson, president of Three Rivers in Burlington, Vt., describes the arrangement as a "win-win" situation. The captive, he says, will broaden its book of business, which Alcoa believes will be profitable, while employees in many cases will receive coverage at a lower cost and with better terms and conditions than they could obtain on their own. For example, for each year a policyholder purchasing auto coverage does not file a claim, the policydeductible will decrease by$50 with no increase in premium.

Additionally, employee policyholders will be able to pay for the coverage through automatic payroll deduction.

The program will be available nationally to about 90,000 Alcoa employees and retirees. Premium flow by the end of the program's first full year could hit $6 million, the company estimates.

Alcoa, the nation's largest aluminum producer, uses Three Rivers to fund corporate property, excess workers compensation and other liability risks. In the past few years, Alcoa also has begun funding certain employee benefits through the captive.

Interest grows

Only a few employers now use their captives to reinsure personal lines, but that number is expected to grow as the appeal of such programs becomes better understood, benefit and captive expert say.

"We have seen interest grow and now are beginning to see implementation of the programs," said Mark Cohon, a principal with American Benefits Consulting in New York, which worked with Alcoa in developing the program.

"We have a couple of clients that are doing it and a number of others that are considering it," said Peter Densen, a managing director with IRMG, a captive management unit of Aon Corp. in New York.

Aside from broadening a captive's book of business, which can bring more stability to results, adding personal lines offers another benefit for employers, Mr. Densen said. Such business is considered unrelated to the parent and, as a result, can increase the chances of an employer being able to take a tax deduction for premiums it pays to captives for its own property/casualty risks. Courts have ruled that such deductions are allowed as long as about 30% of a captive's business is unrelated to the parent.

While growing in popularity, funding personal lines coverage is not a good fit for every captive, experts say. For example, such an arrangement likely wouldn't be attractive for employers with a heavy concentration of employees in catastrophe-prone areas, such as those where hurricanes are a significant threat.

"You'd have to purchase catastrophe reinsurance, and that would use up much of the savings," Mr. Densen said.

Three Rivers' Mr. Wilson said the captive-funded program is able to provide employees better coverage at lower costs than the retailmarket for several reasons, including lower overhead.

Mr. Wilson credits cooperation with Alcoa's human resources department in developing and launching the program. "They are very excited about this as well," he said.

Such cooperation between risk management and HR departments can be difficult to achieve, though. "In many companies, the two groups don't communicate very well, and that can slow things down," Aon's Mr. Densen said.

Alcoa is communicating the new program through a mailing to employees and retirees and through a Web site. Mr. Wilson said as many as one-third of employees and retirees are expected to opt for coverage.

Earlier changes

The new program marks yet another expansion of the Alcoacaptive. Last year, for example, Three Rivers, after receiving Labor Department approval, began to reinsure group term life insurance policies written by MetLife foremployees who work for Alcoa and two Alcoa-affiliated companies. MetLife retains 50% of the risk.The current expansion does not require Labor Department approval because personal lines policies are not considered employee benefits and thus not covered by the Employee Retirement Income Security Act.

Additionally, in 2003, Alcoa expanded Three Rivers to fund the benefit risks of non-U.S. employees.