Second Benefits Captive Moves Ahead

While ADM has proposed that its captive be used to reinsure life insurance benefits, Columbia Energy Group's captive "was to be used for disability," said Mr. Hamilton, who is also president and general manager of CSX Insurance Company, a single parent captive of CSX Corporation in Burlington, Vt.

The Department of Labor approved the Columbia Energy captive in August 2001. That captive is domiciled in Bermuda with a branch in Vermont. ADMs captive is domiciled in Vermont, Mr. Hamilton said.

It took more than a year for Agrinationals proposal to be approved by the department, he said. The department takes the position that its not their obligation to act quickly, but instead "to protect the interests of the planned participants and beneficiaries," he suggested.

But Mike Lusk, corporate vice president of Archer Daniels Midland Company in Decatur, Ill., explained that the reason for the lengthy process was "not all because of the Department of Labor. They would analyze it and come back with questions." But he and other representatives of the company were frequently traveling, which delayed the entire process, he said.

"I felt that they were very reasonable," Mr. Lusk said. "I really have no problem with the Department of Labor."

Explaining where the process is at this point, Mr. Lusk said that ADM has sent a letter or an e-mail to each of its more than 15,000 employees, as per the requirements of the Department of Labor. ADM must now certify to the DOL that it has notified all employees, he said.

"They have put into the Federal Register the fact that they are going to grant this exception and are asking for comments back," he explained. This is a 30-day period "which will bring us to around the middle of April." Depending on the comments "or the fact that someone requests a hearing, which they are allowed to do, we should get our final approval at that point," he said.

Mr. Lusk said the letters went out to employees about a week ago and that there have been no responses from employees so far that he is aware of.

At the CICA conference, Mr. Hamilton described what he felt was an "interesting" implication of the test cases, noting that if "someone else were to step forward and paint a fact pattern that is materially the same as what Columbia Energy Group and now ADM have done, theyll be able to qualify for a fast-track review."

This would mean the Department of Labor would have only "45 days to make a determination as to whether they will propose an exemption," he said.

Mr. Hamilton said a request must include provisions similar to those already approved by the department. An entity making the request must be a licensed insurance company, it has to have been in existence for five years, it has to have had an examination within the past five years in its domiciliary state, and it must be domiciled in a U.S. state or territory, he said.

Mr. Lusk pointed out that the determination of similarity is up to the DOL.

Mr. Hamilton said that the employerthe parent of the captivealso has to offer some additional benefit to the participants, an inducement for the arrangement. An example would be "an increase in the level of disability benefit; in the one case [Columbia Energy] that had not been provided before," he said.

To satisfy this requirement, ADM will offer employees accidental death benefits through its captive, adding those death benefits to life insurance policies at ADMs expense.

"The difficulty we have, as risk managers, is in understanding what goes beyond nominal improvement," Mr. Hamilton said. "Certainly, were looking for something substantive but not outrageously costly."

He added that the right balance seems to have been struck by the Department of Labor in both cases.

"The other element that is different," he said, is that an independent fiduciary must "step forward and opine as to the appropriate cost, the appropriate benefit and the appropriate administration of the program going forward. In this case, it is Milliman [USA] that has taken that role."

In the future, he added, "the fiduciary enables the Department of Labor to step back [its] regulatory role"to make the determination that an exemption is allowed "and then to let the business process roll out with considerable flexibility."

Will there be a stampede for fast-track 45-day approvals now that the Department of Labor has moved to approve the second test case?

"I think the dynamic is still there," Mr. Hamilton said. "There is a great benefit to having third-party business in captives. Certainly anyone who is looking at their captive as an insurance company in every sense of the word, including deductibility of premium and deductibility of loss reserves as related to the captive, will be attracted to look into this."

Scott Frazier, executive director North America, Aon Insurance Managers in Burlington, Vt., which manages Agrinational, explained that employee benefits were deemed by the Internal Revenue Service (in Revenue Ruling 92-93) to be third-party business because the beneficiaries on group life policies in question were the employees and not the corporation.

Because of this 1992 IRS ruling, corporations are interested in financing their employee benefit plans through their captives because it helps meet the IRS tests for treating a captive as a bona-fide insurance company.

But this is not to be confused with the original 50 percent third-party requirement of the Department of Labor, he said. The DOL is most interested in protecting plan participants in the employee benefits plan. Accordingly, to get a prohibitive transaction exemption, the DOL used to require a captive to have at least 50 percent of third-party business.

In the Columbia Energy case, and now the ADM case, the DOL relaxed the 50 percent requirement as long as the corporation could demonstrate quantifiable enhanced benefits to the plan participants.

Going forward, Mr. Hamilton said the opportunity "is significant. The numbers are astounding," predicting that fruitful dialogues will take place between benefits managers, human resource managers, the risk management department and the captive management staff members of companies in the near future.

Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.