It is possible to reduce employee benefit costs by 5% to 10% by creating a captive insurance company. The basic process is to have a regular insurance company underwrite all of the company’s benefits-related insurance (LTD, STD, medical, and so on) for a fee, while the captive can either bear all of the risk or apportion some of it elsewhere by purchasing reinsurance. The cost savings comes from the elimination of third-party profits and overhead charges. Also, since this creates a direct correlation between insurance costs and insurance claims, the company will probably become highly interested in controlling its insurance claim experience.
To legally operate a captive for this purpose, the Department of Labor must issue an exemption from some aspects of the ERISA legislation, which usually calls for clear evidence that employee benefits increase or costs decrease as a result of using the captive (though this does not have to take away all of the savings!). Also, the captive must be licensed in the United States (about half of the states have enacted laws beneficial to captives, so there are plenty of choices), have at least one year of audited financial statements, and be fronted by an insurance company with at least an “A” rating.
Operating a captive is expensive; expect to pay an absolute minimum of $100,000 to set one up, and a minimum of another $50,000 per year to operate it. Thus, savings will only begin to occur for larger companies whose current insurance expense exceeds $1,000,000.