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Marketing Captives leading the way Captives remain preeminent in the ART market, By Michael J. Moody, MBA, ARM Risk financing in the United States has been going through some major changes over the past 10 to 12 years. For the most part, commercial insureds have been moving towards the alternative risk transfer (ART) market in growing numbers. So much so, that most experts agree that the current ART market makes up more than 50% of the total U.S. commercial insurance market. And while there are several segments of the ART market that have gained attention of late (i.e., CAT bonds, Triple X Securitizations, Weather Derivatives, etc.), it is the captives that still represent the most active segment. While the captive movement started more than 40 years ago, it is only recently that they have been considered for mid-sized commercial accounts. Today, there are more than 5,000 captives worldwide, and organiza-tions of all sizes are now considering captives as viable risk-financing vehicles. And much of the growth over the past dozen years has been due to increasing numbers of middle market owners. Captives 101 A formal definition of a captive insurance company would include the fact that it is an insurance subsidiary that is owned by its parent(s). But more to the point, according to Michael Mead, president of Crusader Captive Services, “Captives are a form of self-financing by the captive owner, where the captive takes a more active role in controlling its risk dollars.” And while a captive’s original appeal was confined to Fortune 500 companies, today any company that has premiums in the high six-figure range should actively consider a captive, Mead notes. But he points out, “It not just a premium issue; it is really two issues. Certainly premium growth compared to claims paid is one, but it’s also a coverage availability issue.” Ian Kilpatrick, president of the Crusader International Group of Companies, confirms that frequently the availability issue is as important as the premium issues. “One of the main reasons for a captive in the first place is coverage availability.” Despite an overall soft market today, Kilpatrick observes, “Some coverages still may not be available in the commercial marketplace.” Examples of these market shortcomings would include flood, earthquake, some TRIA exposures, sexual harassment, and construction defects, to name just a few. This is where the captive can shine, he says. “The captive can provide tailor-made coverage expansions,” that are simply unavailable or unaffordable in the commercial property and casualty market. Middle market captives While some agents and brokers have been quick to seize the opportunity presented by the ART market, many have failed to understand the importance of this overall market trend. Mead says that sometimes it is hard for mid-sized agents and brokers to come to grips with the fact that one or two of their large accounts could be a candidate for a captive because they themselves are not comfortable with their understanding of captives. “Agents may not be comfortable broaching the subject of a captive with their largest customers, he says. “But, agents have to recognize that they will have a continuing role to play with a client’s captive.” The important thing is to recognize that the management at most mid-sized accounts will have already been exposed to the captive concept. While “the potential for other agents and brokers to present the idea of the captive to your client is high,” Mead notes, “it is far more likely that it will be some other professional service provider segment.” He indicates that the legal community has really been attracted to captives of late, for obvious reasons. Mead confirms that attorneys represent one of Crusader’s largest new business sources. “If your client doesn’t get an answer from you or your competitors, he will ask his attorney or accountant,” he states. What this means, of course, is that both groups, lawyers and accountants, are already broaching the subject of a captive with many mid-sized accounts. Additionally, Kilpatrick notes that many associations, both at national and state levels, are also presenting the captive concept at their various educational conferences. And, of course, many general business trade publications have also highlighted captives recently, so the chances are great that the senior management at most mid-sized organizations is already aware of captives. And, as Mead points out, managers at some of the agent’s customers may even be waiting to hear their agent say, “Maybe its time to look at the captive alternative to see if it has any long-term benefits for you.” There is a big difference, however, between recognizing the potential needs of several large accounts and determining the best way to proceed proactively. Here Kilpatrick says the agents need to take a cue from the lawyers and accountants. He points out that most mid-sized law firms and accountants firms do not have in-house expertise to handle the captive feasibility and formation on their own. So, rather than develop an internal expertise in the various aspects of the captive market, they establish joint venture relationships with other independent service providers. Kilpatrick believes that this is the best way for the mid-sized agents and brokers to proceed as well. Like several other independent captive service providers, Crusader has developed what they refer to as a “preferred partner” network that would work in conjunction with mid-sized agents in reviewing a captive feasibility. While Crusader would provide the overall captive consulting and captive management, Mead points out, “We also have other well-qualified service providers with expertise in audit, legal, actuarial, and claims, to name just a few. These are firms that we have long-term relationships with, and we feel comfortable recommending.” Mead states that typically the first step in determining the viability of a captive is the feasibility study; however, Crusader has developed an interim step known as the “indicator study.” This can provide agents with a quick way to assess whether or not they should consider approaching their customer about a captive. The study is designed to provide an agent with a better understanding of the captive concept, generally, and, specifically, some insight into how best to proceed with the agent’s account. Mead says that the indicator study can typically be completed quickly and inexpensively and only requires five years of premium and loss data. Opportunity knocks Certainly one concern of any agent who is considering suggesting a captive to a customer is: What happens to the agent if the customer decides to form a captive? “That is a great question,” Kilpatrick says. That is one of the major advantages of suggesting the captive to an account in the first place, he points out. “Most important, there will be a change in the relationship with your customer,” he says. “You move from a placer of insurance to an advisor who assists the client in structuring their risk financing program.” And he notes, “Obviously, this elevates the role of the agent.” Another common concern voiced by agents is, “What happens to my revenue if my customer decides to form a captive?” Crusader has generally found that the overall costs involved with a captive are reduced by 6% to 18%. But Mead indicates that the premiums for a captive for a mid-sized organization typically flow through a fronting carrier; therefore, the agent will continue to receive commission in the same range as previously. He also points out that “someone still has to service the customer at the retail level.” Many captive experts are predicting that the captive movement within Main Street accounts is really just starting. Captives have become a very popular risk-financing tool that provides maximum flexibility to any risk-financing program. And with the additional possibility of adding several types of employee benefits to captives, they can provide further strategic value to their owners. While the employee benefit aspects have not emerged as quickly as predicted, there is little doubt that using a captive for employee benefits is just a matter of time. While coverages like long term disability and term life insurance typically require a Department of Labor (DoL) approval, other benefit-related coverages such as medical stop loss can utilize a captive without DoL approval. Additionally, some mid-sized corporate owners also view a captive as an integral part of their asset protection and wealth accumulation plans. The opportunities offered by a captive provide a critical role in the strategic planning of many corporations. Additionally, many believe that a captive is the first step in developing the holistic approach to risk management known as enterprise risk management. Conclusion The movement to captive insurance companies has been changing—and will continue to change—the face of the commercial property and casualty insurance marketplace. While the utilization of captives was initially confined to Fortune 500 accounts, those days are long gone; and mid-sized agents and brokers need to understand the importance of captives to their long-term success with mid-sized accounts. The current soft insurance market is the ideal time to consider forming a captive because reinsurance and fronting carriers are generally available and reasonably priced. Crusader’s Kilpatrick believes that, “Businesses today are probably more aware of captives than the agents think.” Mead says that Crusader has found, “More and more, small to mid-sized businesses are looking to captives.” And, Mead points out, “To ignore this fact is to endanger an agent’s future.” * |
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