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Deriving Value from Routine Workers' Compensation Reserves
A large forest products company was retaining its workers' compensation losses on its balance sheet and paying claims as they came due. Although the firm regarded these expenses as a cost of doing business, it was looking for ways to derive greater financial advantage from these cash flows and take care of other business objectives. However, there didn't appear to be any way to accomplish this goal through internal management of the funds.
Marsh was called in and developed a pro-forma demonstrating the value of forming a captive and assisted the client with the formation and management of the captive, as well as the underwriting and reinsurance transactions to implement the program.
The captive was set up to insure the liabilities, cede and assume premiums and losses among a group of participating captives, and enabled the client to diversify their captive's underwriting by assuming unrelated risks. Since participants represented a cross-section of businesses, they enjoyed greater stability of underwriting results, while the client benefited from the favorable tax treatment of the captive's premiums.
Additional benefits included a net after-tax financial advantage from formerly static cash flows, a diversified and potentially more stable liability and an opportunity to insure other risks in the future.
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