By the time we reached this point in the current insurance cycle, many people believed that the alternative risk market would be pretty much “dead on arrival.” Despite one of the longest, extended soft markets in history; nothing could be further from the truth. In fact, there are signs that the alternative risk transfer (ART) market is actually growing. Recent news from Vermont, for example, notes that the state has already licensed 19 new captives during the first six months of 2010. Several other domiciles are also showing increasing numbers.

And if this were not surprising enough, conventional wisdom has been that captives have been the domain of the larger, Fortune 500-type organizations. However, the majority of the current growth has been in the mid-sized insurance buyers market. Many of these corporations are beginning to see the value of ART programs.

One organization that has been able to take advantage of this middle market trend is General Agency Services, Inc. (GAS). According to John E. Briggs, CEO, his company is a risk-sharing program manager. He points out that GAS specializes in “providing commercial property and casualty alternative risk solutions for niche programs nationwide.”

Having been in the alternative risk market for about 15 years, Briggs first became involved in ART while working for the Michigan Oil and Gas Association (MOGA). He notes that in 1995, MOGA helped 17 association members form a self-insured group (SIG) workers compensation program. Then in 1998, the SIG was converted into a Bermuda captive, Energy Producers Insurance Company (EPIC). The conversion of the SIG represented a major turning point in his organization’s growth plans.

According to Briggs, the captive was quite successful and MOGA wanted to take the program national, “but they were not able to do so financially,” so it remained an exclusive program of the Michigan Oil and Gas Association.

The development of EPIC, however, provided Briggs with a template for the future of his firm. From this experience, he was able to see the advantages “by capitalizing in a less traditional marketplace where the agencies were able to gain some exclusivity with their customer base.” This was very important as Briggs began expanding the business in 2000. He already realized the value of partnering with agencies that had extensive knowledge and experience in their customers’ business segments.

It was only natural that GAS’s first program was directed at the oil and gas industry, and to further their efforts they purchased EPIC from the MOGA in 2004, and immediately turned it into a national program.  Since then, GAS has developed a number of other highly specialized, national niche programs that include:

• ArborMAX—green industry solutions for professional tree care companies

• Commercial Electrical Contractor’s program—electrical trade contractors

• National Crane program

• National Craft Brewery program—microbreweries, brewpubs, etc.

• Oil and Gas Exploration program—independent oil and gas producers and service contractors

• Farm Labor Contractors

GAS also has two other programs: NECA West ADR Workers Compensa­tion program and a heterogeneous workers compensation program.

The key to GAS’s involvement, according to Briggs, however remains the same. “We are looking for agencies that have significant knowledge regarding a specific class of business and that enjoy a unique relationship with a group or association.” He reports that more than 100 different agencies currently produce business for GAS.

While Briggs notes that each program has its own specific operating details, some generalizations can be made. First and foremost, he says, it is important to understand GAS’s role. “We are not a retail broker,” he points out, but rather, “we are a risk-taking managing general agent.” For that reason, he says it is important to find retail agencies that have already developed a unique advantage with the group.

“They either control the book of business or they are recognized experts in the industry,” Briggs explains. Frequently, he says, this means that it is “controlled business with barriers to entry from other brokers.” This usually is an industry sector that is associated with either high severity or high frequency.

As currently structured, GAS has decided to take a meaningful quota share of the first layer of reinsurance via one of their captives. Briggs notes that on the majority of their programs, “meaningful” means “we, along with our partners, take 50% of the first $1 million of reinsurance.”

He also points out that by structuring the program in this manner, “where we take a significant amount of risk, our interests are aligned with our reinsurers/fronting carriers.” In order to make certain that this approach works for the reinsurer/fronter, “we even request our TPA to take a risk position.”

In some instances, the producing agents and brokers may also take a risk position; however, for the most part, the insured is unaware that the program involves a captive insurance company. The insured just sees the fronted policy from an A rated carrier that is providing coverage on a guaranteed cost basis.

Briggs notes that the average size accounts that are involved in the national programs are about $30,000 to $60,000 in premium. Due in large part to the size of the accounts, he says, most of the insureds are unwilling to take a risk position. Accordingly, GAS does try to get the remaining participants to the transaction in a risk position. They believe this has worked well for them in the past.

Briggs says that the last few years—the height of the soft market—have been a learning experience for many agents and brokers. At this point, most agencies are finding that they have to keep running just to stay even with the crowd. “In order to maintain your agency’s profitability, you need to do a lot more work, (i.e., add new accounts), just to end the day with the same revenue as the prior year.” He points to the workers compensation market as a good case in point.

“Four years ago, workers compensation made up about 55% of our book of business; today it’s in the 35% range,” according to Briggs. He indicates that there has been some minor decline due to a reduction in exposure basis, but the majority is due to falling rates. He adds, “In many cases, workers compensation rates over the past five years have dropped over 50%.”

Agencies that specialize in mid-sized accounts “must create transactional efficiency,” Briggs says, adding that this is one of the real keys to success in the middle market insurance business, in general, but even more important in the ART solution market.

Briggs says, “Those captives that are formed because of concerns about costs typically disband because of costs.” The soft market does, however, offer an excellent period to start a captive. Not only from the standpoint of more available markets, and lower pricing, “but other important issues as well, such as broader terms and conditions which can be obtained today,” he explains. And he says, while underwriters are quick to increase pricing as a market hardens, terms and conditions tend to remain longer.  

Over the past 10 or 12 years, the alternative risk market has continued to take commercial accounts away from the traditional insurance market, despite decreasing rates. Frequently, when the ART market is discussed, there is a tendency to lump all captives together, even when each captive has a little different approach as to how it is utilized.

General Agency Services has chosen to use an aggressive, quota share approach to reinsurance/fronting costs. However, the captive is pretty much in the background with regard to the actual insureds. For the most part, the insured only sees a fronted policy from an A rated carrier and they have no risk position.

GAS’s approach to the ART market is one more method designed to gain the advantages that can be obtained from the use of a captive. And it illustrates the fact that each situation calls for a unique solution to risk-financing problems. As mid-sized agents and brokers are finding out, “One size does not fit all.”