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Agency captives: Still attracting attention Great American offers "the real deal" in its partnership with agents By Michael J. Moody, MBA, ARM The commercial property and casualty insurance market continues to turn to alternative risk transfer (ART) solutions, which today account for more than 50% of commercial insurance business. And one of the most popular ART solutions continues to be captive insurance companies. While there are many reasons for this interest in the captive insurance option, one of the key factors is that it can lessen the impact of the cyclical nature of the traditional market. The captive’s ability to offset some of the adverse, recurring market effects has gotten the attention of both insurance companies and their agents/brokers. And while the initial reaction of some agents/brokers was to avoid any mention of captives, many are now seeing the benefits of being able to utilize a captive in the strategic aspects of their long-term business plans. Today’s captive marketplace offers agents/brokers a variety of ways to participate in this growing market segment. However, one of the most effective methods for mid-sized agents/brokers to become involved in this movement is through the use of an agency captive. Agency captives, also known as producer-owned reinsurance captives, have been a viable approach for agents/brokers to get involved with the captive movement for years. In its simplest form, agency captives are a way for the agent/broker to participate in the underwriting of their business. Agency captives can be formed by a single agency or a group of agencies. The problem, however, with agency captives has historically been finding a good insurer partner to work with. Proper perspective While there are several insurers that are offering agency captive arrangements, one of the insurance companies that has been receiving a lot of positive attention of late is the Great American Insurance Company (GA). According to Gary Powers, president of GA’s Alternative Markets Division, they have been involved with agency captives since 1999. “Our involvement began as a result of a reorganization of businesses that were not part of the sale of the commercial division,” he notes. A portion of business that was retained by GA was the program division, which had been having difficulties that were evidenced by combined ratios in excess of 100. As a result, GA was exploring ways that this business could become profitable. At the time, GA was already involved with one agency captive, and a second one was also being transferred to the Alternative Markets Division from another GA operating division. Powers recalls that the division management, with the assistance from the agency captive owner, sat down and formulated a business plan that resulted in the success of the initial GA agency captive concept. Agency captive basics One of the keys to GA’s success with its agency captives is that its business model was jointly developed with assistance and input from agency captive owners. As of July 2006, GA had 15 agency captive partners and was looking for more. According to Powers, “Our three- to five-year plan would be to get to 25 to 30 agency captives.” From the start, GA has realized that the agency captive concept was not right for all agencies and as such, “developing a large number of agency captives has never been the driving force to our business model,” says Powers. Rather, he notes, “It is about finding the right agencies, with the right book of business, in the right geographic territory.” In that regard, there are a number of factors that GA reviews when considering a new agency captive partner. One of the most important is that GA “seeks opportunities that allow us to leverage the agency’s expertise,” observes Sarah Comerford, marketing director for the Alternative Markets Division. It is also important to consider the geographic locations involved, since, Powers says, “we try to afford each partner a degree of franchise value with their agency captive.” He goes on to point out, “It is hard enough to compete with other agents, let alone from the same carrier.” As a result, GA tries to maintain some degree of geographic separation, depending on the line of coverage involved. Over the past few years, GA has established a formal due diligence process when considering new agency captives. Comerford says this starts with the initial inquiry from a prospective partner. One of the first orders of business is a face-to-face meeting between the parties. Comerford says it’s important that GA gets to know the prospect as well as possible—they want to get a feel for the agency principals, their staff, and the agency’s place in the community. Additionally, the traditional actuarial analysis of the agency’s book of business is a standard step in the process. An in-depth underwriting review is also completed during this phase. Additionally, GA performs a complete review of the agency’s financials since it will have a direct bearing on how much risk the agency can handle. Once a favorable finding has been established in the financial, actuarial, and underwriting reviews, it comes down to the final piece of the puzzle. “It is not just the book of business and its profitability, but rather it ultimately comes down to the people side as well,” says Comerford. Once there is an agreement between the parties, the agency is free to form the captive. While GA will provide advice and counsel, the agency is free to establish the captive wherever it chooses. Comerford points out, “GA does not dictate which captive domicile, captive structure or even the captive manager the agent should use; however, GA will complete a due diligence review on each service provider that is selected.” But once the agency sees the opportunities that can arise from the agency providing value-added services such as loss control, claims, etc., the agency frequently will choose to retain these rather than outsource them. GA has formulated a practical guideline when reviewing potential partners, but as Powers points out, “It is only a guideline and each deal is looked at individually.” For the most part, the agency would ideally have a book of business of at least $3 million that could be taken into the captive. Individually, the insureds should range from $2,500 to $20,000 in revenue. This is the typical size that GA deals with, “but flexibility is the key word here,” stresses Powers. For example, smaller books of business will be considered if there is sufficient growth potential. As with any agency captive, risk sharing is a key aspect of the arrangements. Historically, the reinsurance on the first layer of coverage, which is written through the captive, has a limit of $500,000 and it is typically provided on a 50/50 quota share basis. Once again there are potentials for optional limits and participation. While some of the current agency captives have been an outgrowth of existing relationships with the agencies, “the agency captive program is open to any agency that meets the criteria,” says Comerford. Proof is in the pudding The agency captive concept is not a new scheme; a number of insurers over the past 20 years or so, have come and gone from the market. However, GA appears to have found the ingredients that can make these programs work. Denny Johnson, president of Brooks Insurance Agency in Toledo, Ohio, is one agent who has found the GA program to his liking. Johnson’s agency captive is in fact a rollover from another insurer. His captive is over 20 years old and includes three other agency owners in the Ohio area. Johnson says that the arrangement works because of its “long-term focus between the partnership of GA and the captive for the benefit of our customers.” He goes on to note, “It is due in large part to our ability to provide stability that is missing in the traditional insurance industry.” His captive covers a heterogeneous group of insureds and provides all lines of coverage. “We were able to do a rollover of our captive business to GA and have been happy with the change ever since.” He points out that the captive can provide a competitive advantage due to the continuity of coverages. This is all possible, he says, “ because the partnership between the captive and GA has a shared focus.” Another of GA’s agency captive accounts is a captive that was started in 2000 by Larry Chasin, president of LiquorPak Associates in Cedar Knolls, New Jersey. Chasin’s agency captive represents yet another way to utilize an existing book of business. This captive covers a homogenous class of business, fine wine shops, in which his agency had already distinguished itself as an expert. Their accounts are spread over 30 states for this class of business and Chasin points out, “the captive leads to a stable market over the long-term, something that the traditional markets have, for the most part, been unsuccessful in doing.” According to Chasin, GA has been very helpful in establishing a partnership and a smooth transition for their existing book of business. As with any new idea, typically a pioneer needs to break the trail. Such was the case for George (Shad) Steadman, III, president/chief operating officer of Rutherfoord in Roanoke, Virginia, who notes there was no rollover of an existing book of business in their agency captive. And as a result, their movement to an agency captive was not quite a smooth as the others noted above. According to Steadman, they began looking for an alternative approach for a diverse book of business that, while “it was a pretty good book, was scattered all over the place.” After an analysis of the book, Rutherfoord concluded that it would be willing to take some risks on this book of business but was uncertain how best to do that. The agency approached GA in 1997 and asked if GA would consider doing an agency captive. GA agreed to consider it but pointed out that it had never done one before. “There was a learning curve for both of us,” Steadman says. He continues, “The concept of partnership gets overused in our business, but from the very first agreement that we entered into, it was always extremely fair; it cut evenly each way.” And as the relationship has matured, Steadman points out, “It has been the best partnership I have ever seen.” Bottom line GA’s agency captive involvement has evolved over the years and as it did, it took understanding from both GA and the agents. Power says, for example, “It took us a while to get comfortable with the fact that the agents needed access to information we typically don’t make available.” Changes were required in a number of ways, but he points out, “Today we no longer treat these relationships as agency relationships, but rather they are profit centers for GA They are our presence in that part of the marketplace,” Powers says. But it was not just change on the part of GA that was required, as noted by Chasin. “It required a cultural change from us as well.” According to Steadman, one of the big changes that resulted was the fact that they were now taking a risk on this book of business and “we needed to provide the proper separation between our underwriters and our production team in order to maintain underwriting discipline.” Today GA is among the leaders in agency captives. This is due in large part to the “true partnership approach” it has developed with the agency captive owners. “Agency captives are not for everyone,” says Powers. “You must be of sufficient size to have a large enough book and be able to provide the needed skin in the game.” But for those agents/brokers who wish to become involved with the alternative market, the agency captive may be the way to go. Steadman concludes, “We are able to provide our customers a stable market, quality local underwriting, and superior local claims service.” GA’s movement into the agency captive business has evolved to something special, or as Steadman puts it, “This is the real deal.” * |
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