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Right time, right place SB&T's early recognition of the captive opportunity By Michael J. Moody, MBA, ARM
The alternative market continues to gain ground in the commercial property and casualty insurance marketplace. Latest statistics now indicate that more than 50% of the commercial market is in alternatives, particularly captive insurance companies. Recently this figure has been pushed by a hardening in the professional liability area. Most troublesome have been problems with medical malpractice coverage where both health care facilities and individual doctors have been forced to find alternatives to traditional coverage like captives. Most experts believe that interest in captives will remain high for the next few years. While there are a wide variety of reasons for the increased interest, these would be high on the list: • Hardening of the insurance market following the Gulf Coast storms Needless to say, most of these issues will not be resolved in the short term, thus assuring continued interest in captives. Opportunity knocks It now appears that mid-sized agents and brokers are the ones who are the driving force behind the current surge in captive formations. Doug Grahn, director of marketing, Smith, Bell & Thompson in Burlington, Vermont, notes, “I’ve seen the level of interest in captives increase significantly from the mid-size to smaller agencies I work with on our program side.” He also points out, “Some are just curious, but others have become very well versed in the nuances of captives.” Even those mid-sized agents and brokers who have not yet taken action are contemplating involvement in this movement; however, some agents are uncertain how to participate. An example of how one mid-sized agency went about this journey may prove valuable for those who are considering this option. Roger Teese, president and CEO of SB&T Captive Management Company, and Smith, Bell & Thompson (SB&T), joined the agency in 1973. By 1981, Teese was managing the agency’s personal lines department. But it was another event that occurred in 1981 that would have a profound effect on Teese’s insurance career, because 1981 saw the introduction of Vermont’s captive insurance legislation. Thanks to the leadership of Vermont’s Commissioner of Insurance George Chaffee, the state legislature passed the landmark captive statutes. Over coffee one day, Commissioner Chaffee related his vision for the new legislation to his friend, Teese, thus opening the door to opportunities for both the state and Teese. Teese says he was able to see immediately that this was, “a ground floor opportunity.” Significant growth
Around the same time, Teese also had a conversation with one of his personal lines accounts who advised him that his father was a risk manager for a Fortune 500 company in Cleveland, Ohio, and they were interested in Vermont’s new captive laws. The Cleveland company turned out to be Hanna Mining, which already had a sizable involvement with captive management in Bermuda. But Teese remembers that “they wanted to have a presence in Vermont as well and that a joint venture with SB&T appeared to be an appropriate method for doing that.” Within a short time, Teese had a captive management company operational in Vermont. The early years of its operation, during the early 1980s, saw little activity due in large part to the soft insurance market at the time, but all that changed in the mid-1980s. The insurance market deteriorated quickly, and the captive movement was fast to respond, with Vermont taking a leadership position for domestic captive domiciles. At the time, there were only three captive managers in Vermont, SB&T’s joint venture and two national insurance brokers. “Within a matter of weeks, we had 12 captives—all highly visibile and prestigious accounts,” Tesse says. This initial success served SB&T well as they moved aggressively into the captive management arena. Current situation SB&T has continued to build on its early success with captives. “Today, we have 19 captives,” says Gary Griswold, director of captive operations. Of that number, he points out, “11 are group captives and five of those are risk retention groups.” Although the mix of business has changed over the years, the original core business has remained about the same. Griswold notes, however, “some of the older captives are now forming additional captives as their business situations change.” Another recent development, Griswold notes, is to bring employee benefits into a captive. “We have several captives that are considering this, and they are very interested in this whole topic.” Teese adds, “We are just beginning to see this happen, but I think this is going to be huge once it gets going.” In order to better serve their clients in this area, SB&T is developing a relationship with a national life insurance company, according to Teese. In this way, they can “provide fronting and reinsurance needed to complete these deals.” One further change occurred in November 2004 when SB&T was purchased by Hilb Rogal & Hobbs (HRH), the world’s tenth largest insurance and risk management intermediary. The purchase was a natural progression for HRH since it had been dealing with SB&T’s programs division for years. “The acquisition of SB&T, with its MGU expertise and captive management experience, is an important part of our growth strategy,” says Martin L. Vaughan III, HRH chairman and CEO.
The purchase by HRH is allowing SB&T Captive Management Company to further its expansion plans. According to Teese, HRH has an operation in Bermuda, which has become a resource for SB&T. HRH Chairman Vaughan also notes that, “SB&T Captive Management Company shares our goals and philosophy and has become the flagship of our captive management group, while retaining their independence and broker relationships garnered over the past 30 years.” Teese adds that SB&T is also looking at establishing a presence in other domiciles. “While the presence may start as a joint venture relationship,” Teese notes, “as growth develops and sufficient mass is accumulated, we will look toward our own operations.” Relationships As Teese notes, SB&T’s captive management operation is really based on relationships—everything from the original relationship with Commissioner Chaffee to its interaction with the current state regulators to Teese’s involvement with his personal lines client and the officials at Hanna Mining to the contacts they have established with their current broker network. This network was originally formed as part of SB&T’s program business, but it has paid dividends for its captive management business as well. As a matter of fact, SB&T’s Captive Management Company depends on mid-sized brokers and agents for much of its growth. Teese says that it’s these brokers who “have been a consistent source of captive management leads, since the brokers are not worried about SB&T going after their accounts.” Additionally, they also depend on other service providers for referrals as well. Some agents and brokers express concern that once they utilize a captive, their relationship with clients will change, and they use that as an excuse for not dipping their toes in the captive waters. But Teese says this concern is unfounded. He notes that, “what happens when a captive is involved is that it changes the relationships with the broker for the better. You are no longer just a salesperson,” he points out. “You now become a partner in the arrangement and are on the same side as the insured.” He says that the real advantage to these relationships is that for the most part, they are long-term in nature, and as a result, the broker is “less likely to lose the account.” He goes on to say, that it “really weds the account to you; it is a whole different depth of relationship.” And Griswold adds, “To some extent, it is in the best interest of the agent/broker to mention the captive as an option to the client because, if you don’t, someone else probably will.” SB&T was a local broker that was in the right place at the right time; there is little doubt about that. But, in addition, they established great relationships, strong local ties and a good vision of the future. And with the current expansion of the captive movement and the additional domiciles coming forward, there are numerous growth opportunities for local agents countrywide. Mid-sized agents and brokers would be well advised to consider the captive option as part of their future growth plans as well. * |
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