A stockholder-owned utility needed to re-examine and analyze the funding of its executive benefits and retiree medical obligations to determine whether:

• the insurance program offered the most advantageous funding vehicle
• existing policies were still appropriate
• amounts of insurance were well matched with the company’s liabilities

Passing of time—change of personnel—new requirements—all indicated review

Over the years, the organization had purchased life insurance policies to cover nonqualified executive benefits but had not undertaken any regular review. The human resources staff that was charged with oversight of the program had not been involved in the original funding strategy. The staff was uncertain about how well the funding strategy was meeting the company’s needs and if the strategy still worked in the way it was intended. Additionally, tax law changes had significantly altered the rules affecting some of the life insurance products, while changes in prevailing interest rates and rates of investment return had altered the apparent cost/benefit performance of other policies.

IRC section 409A imposed new requirements on the plan design as well, providing a further need for program review. The client sought Milliman’s assistance in adjusting the plan design, helping it understand nonqualified plan funding, and developing an action plan to ensure that the insurance product investments matched the needs of the benefit programs.

Assessing policies for adequacy and cost-effectiveness

Milliman worked with the utility’s various insurers to develop and assess current projections of available surrender values and expected death claims for each class of insurance. Rates of return to the policyholder were examined under a variety of scenarios, using assumptions developed by Milliman and the client. We compared the total amount of existing prefunding (determined by the policies’ current surrender values) with the valuation of existing nonqualified benefit liabilities, taking into account recent changes in the plans, plan participants, and increases in the qualified plan limits.

We also analyzed each class of policies for termination or surrender costs and the tax implications of surrendering each class. Included in this analysis were executive retirement benefit policies and policies backing the client’s retiree medical obligations.

The comprehensive evaluation produced a report containing:

• a complete inventory of all insurance assets supporting the programs
• data on past and projected investment performance and death benefit cash flow
• current insurance premium levels
• costs of surrendering the life insurance policies
• a comparison between the funded amounts and liabilities
• a full discussion of alternative action plans for the future

Armed with Milliman’s independent analysis, the client determined that, overall, it carried an excess of insurance coverage supporting the nonqualified executive benefits. The client identified the most cost-effective insurance products to retain and those to surrender. The utility also pinpointed those insurance polices that were ideally suited for contribution to a new trust, which provided benefit security to the covered executives.

Instituting annual evaluation

Milliman’s independent analysis and clear communication of a complex subject gave the client a better understanding of how to manage the insurance components of its executive benefit program. The staff gained the confidence it needed to take control of these assets in the future. The utility established a monitoring process to review and evaluate asset performance annually, to be performed by its treasury department.