ARTful Measures
As comp premiums rise, group captives become an attractive option
Concern about the financial health of the insurance marketplace continues to grow as losses mount. For example, some lines of property insurance are already seeing pricing issues as the market moves through 2017. Some industry observers, however, indicate that pricing in the overall insurance market may be unaffected because of the massive amount of capital that remains. Renewals that occurred at the beginning of the year will offer significant insight into this issue.
Although it appears that several lines of coverage may have some displacement issues, other coverages, such as workers compensation, should remain unaffected. In fact, comp has returned excellent results over the past few years. Conning & Company reported in a recent study, 2016: Record Profitability in Workers’ Compensation Insurance – Strategies for Continued Success, that 2015 showed one of the best results in over four decades, with a combined ratio reported at 95.4%. Conning projected deteriorating results going forward, however, in large part because of the line’s historical cyclical nature.
This warning has caused a number of insurance buyers, agents, brokers, and risk consultants to begin planning for increasing workers compensation costs. Although self-insurance frequently was an option in the past, it has several shortcomings, such as securing state approval to self-insure, which affects the viability of the solution. This issue is complicated for employers that have multi-state exposures.
Several viable options can assist middle market buyers in preparing for workers compensation premium increases. One option is group captive programs like those being offered by excess workers compensation carrier Midwest Employers Casualty Company (MECC). This W. R. Berkley Corporation member company developed its captive practice to assist clients in optimizing their workers compensation operations and lowering the costs that are incurred as a result of an employee injury. MECC can provide resources and tools to serve the needs of the group captive market. It has been in the excess workers compensation market since 1986 and in the captive market since 2014. MECC provides specific excess, as well as aggregate stop-loss coverage, in addition to fronting capabilities for group captives. Other services, such as frequency claims handling, captive management, and loss control services, are contracted on an unbundled basis, notes Timothy Galvin, MECC’s president.
An agent or broker who is contemplating alternative risk programs for clients or prospects should consider establishing relationships with best-in-class business partners and service providers.
A group captive can consist of either homogeneous or heterogeneous risks and can be domiciled in either onshore or offshore jurisdictions. Galvin points out that the actual captive structure can vary from a traditional group or association captive to a rent-a-captive. He notes that MECC’s focus is on developing a positive value proposition for the captive. According to David Anderson, MECC’s underwriting director of group captives, “The preferred classes of business we are currently interested in are healthcare and professional services providers, as well as those risks that have fixed location-type exposures without significant transportation or height exposures.”
A key factor that MECC considers in evaluating candidates for group captives is overall premium size. Anderson says MECC seeks groups that generate a minimum of $5 million in ground-up workers compensation premium. He adds that it may be challenging for an insured to have the full $5 million at the start of the program, but that the program should have the potential to grow to $5 million or more over the first 12 to 18 months. MECC realizes that group captive programs can take time to get started. “Many times they will require at least 18 to 24 months to become operational,” Anderson says, noting that MECC will assist in developing start-up programs and also will function in an advisory role during the formation and implementation process.
Regardless of the group captive’s structure, it can function as a single-state or multi-state program, Galvin indicates. From a risk transfer/risk assumption standpoint, details will vary from group to group. As with its original individual and group self-insured business, MECC’s methodology for group captives focuses on controlling the total cost of workers compensation risks from the ground up, to assist clients in managing the exposure within their net retention.
In addition, MECC provides catastrophic claims management services. Industry loss data indicates that approximately 60% of workers compensation premium is allocated for claims payments; it is critical for the group captive’s success to develop a strategy to reduce claims as much as possible. One way to accomplish this goal is to use the expertise and resources of a specialty workers compensation insurer that turns to the alternative risk market to manage severe losses, which typically result in the most expensive claims. According to MECC, these claims also frequently turn out to be the most complicated to manage effectively. MECC provides its clients an in-depth view of the process that helps them design a proactive claims program in collaboration with their claims administrator.
All too often, workers compensation claims create an adversarial relationship among the employee, employer, and insurer. Fraud and abuse occur frequently in the workers compensation system. Many employers believe that injured workers are just looking to take advantage of their injury. “Unfortunately, the insurance industry’s relationship with injured claimants is often predisposed to conflict and complication from this bias,” Galvin observes.
To minimize this bias, a shared philosophy of trust and collaboration is required among the captive/employer, the employee, and the excess insurer and claims administrator. Although this positive relationship can exist later in the claims cycle, Anderson believes that a superior approach is to “establish a common philosophy at the inception of the program, prior to any claims activity developing.”
MECC has found that establishing a proactive claims relationship, and providing the claimant the best medical care at the outset of the claim, generally will achieve the best outcome for the claimant and the lowest cost for the captive. MECC provides its clients state-of-the-art severe claims management services. Its catastrophic claims unit provides critical information and resources to establish a road map to handle the most difficult, complicated, and expensive claims.
Based on MECC’s experience, Anderson notes, “The best outcomes are derived from a trusting claims relationship, through providing the best medical care for the employee and the most cost-effective handling for the employer/captive owner.”
The efficient allocation of alternative risk transfer program costs is a key challenge for group captive programs. As Galvin remarks, “There is a significant education aspect to marketing these programs.” MECC states that it is prepared to collaborate with the captive’s service providers throughout the feasibility and implementation process.
Whether it is through a captive manager/consultant or an agent or broker, MECC will provide advice and counsel regarding the structure and selection of preferred business partners to service the captive. Because the education timeline can range from 18 to 24 months, MECC focuses on identifying new captive prospects and marketing to groups and associations that are interested in exploring a captive option.
An agent or broker who is contemplating alternative risk programs for clients or prospects should consider establishing relationships with best-in-class business partners and service providers.
The author
Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that was established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.
