Driving Innovation: How Royal Philips Leverages EB Cell Captives

Speaker A: Welcome to HRBytes. I am Neel Siegers, Global Benefits Principal Consultant at Aon. I am joined by Sven Roeland, EB Financing Leader at AON and Martin Delsmann, Benefits leader at Royal Phillips. Today we're diving into employee benefit captives and how organizations are increasingly turning to captives as a solution for managing employee benefits.

Speaker B: Thank you for the introductions Nele. Now before diving into the subject, maybe quickly, for those listeners not familiar with the captive concept. When we talk about a captive we refer to an insurance company which is set up by a business, a multinational organization to insure or reinsure its own risks. You may call it an internal reinsurer. Employee benefits risk, given its employee oriented nature is in general strongly regulated across the various countries and as a result self insurance often isn't an option. This is where reinsuring that employee benefit risk or EB risk into the multinationals own captive aims to combine the best of both worlds. UM on one hand comply with strong regulation and safeguarding the employees rights by using a local compliant insurer to issue the covers and on the other hand, having the captive sit behind that local insurer to leverage flexibility and efficiency. Which you Nele, will now tell us all about by walking us through the drivers behind this new wave of captive uptake in the EB space.

Speaker A: As you already mentioned Sven, several drivers are influencing the uptick in captives for employee benefits. First, the need for increased governance and control over employee benefits programs. This continues to be a challenge for global organizations. Second, escalating medical trend rates and ongoing high cost claims make traditional insurance less predictable and more expensive. For several consecutive years, global medical trend rates have hovered at uh, double digits only just expected to return to single digits in 2026. However, many regions still face double digit increases. This persistent inflation is impacting employer sponsored medical plans, making it crucial for companies to find new ways to manage and govern these growing costs. And thirdly, financial efficiency is key. Captives can enable companies to recapture underwriting UM profits and reinvest them in employee programs or well being initiatives. Finally, captives can help companies to respond swiftly to global and geopolitical events. Examples from recent years include the pandemic and the war in Ukraine. Companies that reinsured benefits to a captive were able to much more quickly adapt the coverage within their plans to ensure their colleagues were protected through these exceptional circumstances. Captives also facilitate the removal of exclusions or altering plan designs to reflect global well being initiatives, making it easier for companies to implement consistent benefits across their locations. Captives offer organizations the ability to directly finance and control their employee benefit risks, allowing for More transparency, better claims management and strategic cost containment. With benefit cost management cited as the top priority for 70% of employers in Aon's recent global trend survey, it's no surprise we're seeing an acceleration in EB captive programs.

Speaker B: That's a really interesting statistic, Nele. And that leads us to the numbers. Can you share some market insights to illustrate to us the accelerating growth of EB captive in the market?

Speaker A: Sure. Let's look at the evolution in the number of programs out there. How has that changed in recent years? The volume of premium and pooling solutions, which is traditionally the dominant approach in financing employee benefits globally, has been stable for over the past five years. This is despite a global average trend rate of up to 10% over that period. Over the same period, premiums reinsured under a captive solution have grown by around 20% per year. In 2023, premium and captive solutions overtook premiums in pooling solutions for the first time. Based on the recent research, we are now estimating that employee benefit programs reinsured by captives has now reached 3 billion. And we continue to see further growth.

Speaker B: You've raised some great points here, Nele. What about the early adopters? Those EB captive programs which started several years ago, what are we seeing at that end?

Speaker A: Early adopters of EB captives are shifting focus from implementation to optimizing operations, particularly in claims management and driving down high cost claims with more targeted interventions. Early adopters are asking what's driving our claims and how can we use the data to improve future plan design and risk management. And this is also where Philips wants to get to. They are very much at the start of their captive journey, but they are taking an innovative route from the beginning. Martin, you seem to lead the way when it comes to innovation and employee benefits financing. Royal Phillips was the first company into global underwriting back in 2009. And now you will also be the first ever company to run a full blown EB program through Accel Captive. What makes Royal Phillips continuously push for innovation in the employee benefits field?

Speaker C: Thanks, Neil. And I think that you will agree that at Philips, innovation isn't just a buzzword. It is a core part of who we are. It's embedded in our strategy, our vision and our heritage. For over 130 years, Philips has been at the forefront of technological and societal change, constantly reinventing itself to improve people's lives through meaningful innovation. This spirit of innovation doesn't stop at our products. It extends to how we operate internally, including how we care for our employees. As Philips has transformed into a Focused health technology leader. We've also reimagined our approach to employee benefits. We see benefits not just as a cost center, but as a strategic lever to support well being, engagement and resilience. That's why we are continuously exploring new financing models like global Underwriting and now the cell Captive. These aren't just technical solutions. They're part of a broader ambition to build a future proof benefits ecosystem that reflects our values and supports, uh, our people in a rapidly changing world.

Speaker A: Was there any particular event, Martin, or internal strategic shift that triggered the decision to explore Captive?

Speaker C: That is a great question, Neila. There were actually several important triggers. Since 2009, Philips has operated a global underwriting program for employee benefits, one of the first companies to do so. It allowed us to centralize placement and pricing, gain efficiencies and ensure consistency across markets. However, it became clear that this global underwriting model could not be sustained beyond 2025. In the current setup, market conditions were changing and the original global underwriting model capacity was drying up. At the same time, Covid reminded us of the critical importance of having resilient and responsive benefit structures. Our, uh, employees needed coverage and we needed to act quickly. This also raised a strategic question. Should we decentralize our benefits approach and leave placement and pricing to local markets? Or should we use this momentum to take a bold step forward and build a captive? And as you already indicated, we chose the latter. The captive model offers us a way to retain central governance while gaining flexibility, data access and long term financial sustainability. It was a natural evolution from our global underwriting experience and aligned with our broader transformation as a health technology company.

Speaker A: And what specific benefits do you expect the Captive to deliver now?

Speaker C: When I break it down, I see value across several dimensions. The first dimension is on benefit design with a captive flexibility to influence terms and conditions, including for example, removing exclusions which would not be possible at the local policy level. Furthermore, we can enhance the employee experience through innovative benefit offerings. And we can also integrate wellness and prevention programs into the benefit offering. Another important dimension is the financials. Over the past 16 years of global underwriting, we have already achieved significant savings. Our captive feasibility study shows that we can save an additional 8% per year by moving into a captive. This is possible thanks to better economies of scale, lower administrative cost and retaining more of the underwriting margin. With the captive, we will also have full control over how we set our premiums. Operations is another dimension. With the captive model, we will have centralized oversight, ensuring consistency between countries. And as a result, we also expect to reduce workload during renewals for our local teams. It also improves the renewal process which we can align with our global overall budgeting timeline. We also expect a potential reduction in local broker activities. And the last dimension is on analytics. As mentioned before, the Captive model will ensure data transparency and reporting. We will also have increased insights into claims development which will give us the ability to implement targeted well being initiatives to further reduce claims.

Speaker A: It's amazing to hear how your captive strategy will facilitate such a wide range of initiatives. Now tell me, why did Philips choose a self captive rather than a standalone captive?

Speaker C: M Good point. And to answer that directly, it was a strategic choice. We have already operated the P and C Excel in Vermont since 2015, so we are familiar with the model and its advantages. The employee Benefits Cell allowed us to build on that experience and move quickly. It's significantly faster to implement, requires lower premium volumes and gives us potentially access to all major employee benefit networks without the need for extensive local change management. Another key factor was a regulatory and administrative burden. A standalone captive typically requires setting up a legal entity from scratch, managing local licensing and complying with a broader set of regulatory requirements, such as having annual captive board meetings. In contrast, the Cell Captive structure allows us to operate within an existing framework which dramatically reduces complexity and overhead. This makes it much more scalable and pragmatic, especially for a company like Philips with operations in over 70 countries. Furthermore, the Cell Captive setup holds lower capital requirements which when setting up a structure from scratch, is an important element of consideration. Ultimately, the Cell Captive caters the best of both worlds, strategic control and flexibility without the heavy lift of building a captive from scratch.

Speaker A: And Martin, based on what you've mentioned just now, how does this fit into Philip's long term strategy?

Speaker C: What uh, really excites me, and I think this is key, is the potential for long term transformation. This isn't just a financial tool, it's really a strategic enabler. We can experiment with new benefit designs, pilot well being initiatives and even explore predictive analytics. The Captive gives us the flexibility and control to do that in a way that traditional models simply don't. It aligns perfectly with our ambition to be a health technology leader. It also leads in how we care, um, for our employees.

Speaker A: Do you have any advice for other companies considering this route?

Speaker C: If I can give one piece of advice to others considering this route, it's really to start with a strategy. Don't just look at the captive as a pure cost saving mechanism. Think about how it can support your broader goals, whether that's employee well being risk Management or operational efficiency and of course, partner with experts. For us, working with Aeon was key. They really helped us navigate the complexity and build a solution that fits our needs.

Speaker A: Thanks Martin. Any final thoughts you'd like to share?

Speaker C: Uh, to wrap up, I would say the journey into captive is not just about financial engineering. It's about building a more resilient and responsive benefits ecosystem. If you are willing to rethink the traditional models, there's lots of opportunities to create real value for your employees and the organization.

Speaker A: Thanks, Martin. It was great to hear about all the innovative steps Philips are taking to be a market leader in this space. Sven, as the EB Cell Captives leader at aon, what does the AON EB Cell solution has to offer over and beyond the traditional standalone captive approach?

Speaker B: As you know Nele, over the last few years, consultants like us Aeon have already made running an employee benefits captive much easier for our clients. We've built dedicated services around data validation and consolidation. We provide underwriting support. So the operational side is far less demanding than it used to be. But still, we have to recognize a few challenges remain. In the traditional captive setup, most local policies have to be moved to one of the preferred network providers before reinsurance can even start. And that means, even though the benefits of using a captive are shared between risk and hr, the actual success of the project heavily depends on local HR teams doing a lot of the legwork. The AONEB cell captive solution changes that. Instead of being tied to one or two networks, the cell gives access to all employee benefits networks that allow reinsurance to captive. So we remove that limitation from day one. On top of that, the cell has a much shorter time to implementation and far lower minimum premium requirements so companies can get started faster and with smaller initial volumes.

Speaker A: And what does that mean for our clients?

Speaker B: In practical terms, it's a real game changer. Because the AION EBSELL solution gives access to all major networks, we can typically capture 70, 80, sometimes even 90% of the global premium right from the start. That means you're not waiting years to see meaningful results. Most of the savings and benefits come forward into year one. It also takes a lot of pressure off local HR teams. Only a limited number of policies need to move to a new insurer, so local change management is dramatically reduced. Traditionally, we'd look at a three year implementation journey where the focus is on moving policies to the right network. Now with the Cell, we can use that same three year period much more strategically to streamline the setup, rationalize the number of networks used and focus on performance and efficiency instead of migrating policies

Speaker A: between local insurers and Sven what if corporations already have a standalone captive?

Speaker B: That actually turned out to be a question we hear quite often and it was somewhat unexpected when we initially with our EB cell captive solution did not target corporations already holding a captive. It turns out that the eebee network gateway concept, referring to the access to all networks provided by the cell solution is so attractive. Also, large organizations already owning a captive are showing an interest. Now to answer the question, if your company already has its own captive, the EB sell can actually be reinsured back into your existing captive, which means the cell acts as a gateway and becomes the most efficient entry point for EB risks. This approach gives you all the advantages of the cell speed, the network access, the ease of implementation and the move forward savings while still landing the risk and the premiums within your own captive structure. Next to this, there are also organizations which choose to have their EB or people risk as it also is referred to in a separate vehicle. The SELL solution allows this to happen without having to run two full blown captives side by side. In short, the EV cell combines the best of both worlds, the flexibility and simplicity of a cell and the control and strategic depth of a traditional captive. As a consequence of this unexpected interest for captive owning organizations, and given the versatile use of the cell solution, our AEON EB captive feasibility studies now by default cover both the traditional setup as well as the EB cell captive setup, allowing all our clients to assess the solution which best fits their needs.

Speaker A: Martin Sven, thanks for your time today. It was great to hear about the advantages of adopting cell captives. Thank you also to uh, our listeners. If you would like to find out more, please follow the link in the bio and stay tuned for the next episode.