Creating captives the right way

ICS sets up group captives where the agency has "skin in the game"

By Dennis H. Pillsbury

Daniel T. Keough is President of Innovative Captive Strategies, Inc., in Des Moines, Iowa.

Innovative Captive Strategies (ICS) is doing it right,” says Scott Egginton, senior vice president and one of the two owners of the independent agency, Cobb Strecker Dunphy & Zimmerman (CSDZ) in Minneapolis, and an ICS partner. “ICS recognized the need for agents to have skin in the game so they will truly care about risk selection and losses. A lot of captives fell apart because of risk selection. That doesn’t happen under the ICS model. The captives are going to be true to their loss picks; underwriting discipline is paramount. Clients may initially pay more. This is a long-term solution, not a quick fix.”

Innovative Captive Strategies, Inc., Des Moines, Iowa, was established in 1999 by Daniel T. Keough and Holmes Murphy & Associates—an agency in business for over 70 years—to partner with other large privately held agencies that were interested in entering the captive market. Dan Keough, president of ICS, says that target agencies for group captive solutions “have between $10 million and $100 million in revenue. Our goal is to strategically establish a network of agencies all over the country while not crossing over into each others’ geographic territories.”

He continues, “Our goal was to become the best captive consultant in the business—not the largest, but the best. To accomplish that, we need to align with good agencies that are looking for long-term value. We also need to attract the top people in the business. We brought in John Naughton, who has 15 years of experience in alternative risk, to help start our rent-a-captive and individual risk consulting area. Our rent-a-captive solutions are available to agencies of any size. We’ll work with an agency to create customized financial solutions for its clients.”

More recently, ICS hired one of the best-known individuals in the captive arena, Kate Westover, as vice president of alternative risk financing. She also serves as Barbados international business representative. Prior to joining ICS, she was a captive consultant with Argonaut group of companies. Kate also serves on the advisory board of the International Center for Captive Insurance Education (ICCIE, pronounced ‘I see’), an idea conceived by the Vermont Captive Insurance Association in 2001. In 2004, ICCIE began offering a comprehensive educational program, including five courses that can lead to an Associate in Captive Insurance (ACI) designation.

With Dan Keough is Kate Westover, well known in the captive arena, who recently joined ICS as Vice President of Alternative Risk Financing Services.

“Education really is the foundation underlying effective captive creation,” Kate points out. “Being a captive consultant is a much better fit for me,” she says, because it allows for more opportunities to educate the people who choose to retain risk and find ways to mitigate that risk. “The captive really acts like a catalyst to help commercial operations handle risk more effectively. The silos break down—the employee benefits and property/casualty people within the organization are brought together, working to reduce losses.” This is especially true now that employee benefits can be included in captives. “Captives also can be useful for non-qualified benefits in addition to ERISA benefits,” Kate notes. “This can be advantageous for some privately held companies.”

Dan says that what makes ICS different is that it is “all driven around the customer. Everyone is trying to provide value,” he admits. “However, it is not necessarily in harmony with the customer. We make certain the customers understand what they are getting into and that they are successful using this mechanism. That’s why we developed the partnership model and why we align ourselves with good agencies that believe in the concept. They have to be in the game with their customer through taking risks and purchasing shares in the captive.”

Mike Tiagwad, president of The Graham Company, Philadelphia, notes that his agency “determined that the alternative market and group captives in particular would be of great interest as the market changed. We wanted to be the best and that led us to a lengthy search for the right partner after we decided that we did not want to build captive management internally. The search led us to ICS, which helped us launch our own group captive. It’s been a tremendous success.

“Subsequently, we’ve worked together with ICS to help with the transition from group captive experts to cover all types of captives. I feel good that we have an equity stake in ICS. We’ve helped in the search for other quality agencies and develop a true win-win situation for all partners. ICS gets the deal flow and the partner agencies get the expertise,” Mike points out.

The Graham Company has one group captive, a couple of rent-a-captives and is working on setting up a single parent captive for a sizable health care operation in partnership with ICS.

One of the agencies that was identified by Graham as a potential partner for ICS was Scott Insurance of Lynchburg, Virginia. Walker Sydnor, president of Scott, says, “Our interest in the captive world extends back. We’ve been a risk management-focused agency for a long time. We deliberately went that way rather than being transaction focused. We help our clients use their insurance less and have clients that were interested in alternatives. We investigated some deals and capitalized our own company in Bermuda in the mid-’90s. However, we realized that we did not have all the expertise and investigated some national captive options,” Walker notes. “We were concerned about the element of control that these options offered both from an agency standpoint and from a client standpoint.

“Graham pointed ICS in our direction and we got to know Dan (Keough) and the ICS team. We liked them a lot. They were young, energetic and driven, and had the background and the connection. Dan has a lot of experience in the captive world and is a producer, so we spoke the same language. It was a natural fit. We liked the people at ICS and what they could deliver. ICS became our outsourced captive department.”

ICS executives: (from left) Jeffery S. Matney, Assistant Vice President; Teri L. Sporer, Vice President; Kate Westover; Thomas S. Stewart, Assistant Vice President; Dan Keough; and John T. Naughton, CPCU, Vice President.

Scott set up a heterogeneous group captive with 11 clients who “expressed interest. We had talked to a number of our clients and did the education piece with ICS,” Walker says. “It got off the ground in late 2001 with about $5 million in premium in a group captive set up in an offshore domicile. The 11 clients all come from varied types of businesses. What they do have in common is that they are highly risk management-oriented firms with tremendous integrity and good financials. Scott is a shareholder that shares in the risk. Two-thirds of the captive participants were existing clients, some of the best that we had. All the businesses involved have been around for at least two generations of management and the interesting thing is that they have become even better risks since getting involved in the captive. The loss ratio results are terrific.

“Group captives aren’t for everyone,” Walker admits. “Some people don’t want to get up close and personal, and you have to know all your partners in the captive if it is to be successful. Some are bothered by the potential risk shifting and sharing. Our perspective on it is that you must have a lot of integrity about the funding. An independent actuary performs all of the actuarial work and there is no discounting to ensure the integrity of loss funding. We don’t want to be like some of those captives that are calling for 20% or 30% assessments every year. Because of that, the front-end costs are not less than traditional insurance. You have to have the right type of client with a long-term view and an orientation toward risk management.”

Scott Egginton of CSDZ “had some captive involvement in the mid-’90s. We formed a captive-like entity in Bermuda with St. Paul Travelers. What we learned was that you needed at least $1.5 million in premium to make it work. There are a lot of wonderfully run construction companies with less premium who had a willingness to take a risk and control their own destiny. Our mission in the late ’90s was to find the type of program we could bring to those clients. We didn’t want the overhead of building our own captive expertise. A friend at Holmes Murphy told me about ICS and their approach. We liked what we saw.

“We had a group of contractors that was perfect for a group captive and were ready to move away from the traditional market,” Scott explains. “Back in the early ’90s, we went to all our contractors and suggested full-time safety managers. In return, we promised good quality insurance. Well, they went through the cycle and watched their competitors getting the same price as they were, even though they weren’t producing the same strong loss results, and they said: ‘Wait a minute.’

“We started the group captive about three-and-a-half years ago with our agency as a shareholder and assuming some of the risk. So far, we haven’t had any calls to share that risk. The phenomenal thing is our group of contractors is producing a wonderful loss ratio of around 30%. We’ve all become better companies. The peer group is continually challenging all the members.

“Two years ago, we were approached by a large contractor in Las Vegas,” Scott continues. “The contractor wanted to set up a captive and had done a Google search for ‘construction captive’ and found our Salt Lake City office. Thanks to ICS, we were able to put together a plan for a single entity captive and wrote an account with a $5 million equivalent premium. This partnership with ICS has been a great success.” *

For more information:
Innovative Captive Strategies
Dan Keough
President
3001 Westown Parkway
West Des Moines, IA 50266
(515) 223-6964
Web site: www.yourcaptive.com