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36 The Self-Insurer | www.sipconline.net
Taking a Leap of Faith on Captives
Written by Bruce Shutan
Editor’s Note: This is the second of a three-part monthly series leading up to SIIA’s National Conference in October that is geared toward educating insurance brokers and advisers on alternative risk transfers involving captive insurance solutions. The aim is to address any concerns and misperceptions, as well as better prepare them to answer client inquiries about these arrangements, particularly in small and middle markets.
With more than 25 years of traditional brokerage experience under his belt, Danny Plante has guided clients with unusual contingencies in their business that, upon closer examination, weren’t entirely a surprise.
Many are in the marine and trucking industries, with heavy casualty exposures that aren’t appropriate to assume within a group captive solution. Those same companies, however, are also confronted with all manner of consequential loss that might accompany such severity and are not adequately addressed through the traditional market. So they end up being excellent candidates for inclusion in a captive.
An EVP at Towne Insurance, Plante says it is naïve to presume that emergent risks will be adequately addressed through traditional means “when the insurance industry really hasn’t caught up with the pricing parameters and the coverage forms that create a reasonable level of value.” It’s a message clearly aimed at fellow brokers, many of whom may be apprehensive about placing clients in an alternative risk transfer arrangement they view as a threat to their compensation – at least in the short run.
August 2015 | The Self-Insurer 37
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Risk management is a centerpiece of P&C group captives given that most of the premium is set aside to pay claims and if there’s a significant enough reduction in claims costs each year, then members of the captive will be able to put more dollars in their pocket.
They also shield employers from hard-and-soft traditional market cycle swings, explains Chad Kunkel, who runs the P&C group captive practice at Artex Risk Solutions. As such, he says brokers have a better opportunity to create lasting relationships with their clients, who become long-term owners of their insurance rather than annual buyers.
While Kunkle cautions that group captives “aren’t necessarily always the cheapest deal every year,” he believes they’re the most prudent long-term solution for financially strong middle-market companies. He says the idea of a captive might not sit well with brokers who’d rather troll for the best possible short-term deal in 20 different markets year after year.
P&C group captives offer “an additional layer of risk management that can be tremendously helpful,” explains Art Grutt Jr., an insurance agent and EVP, managing partner with Cambridge Insurance. “And so, it’s really just an extension of what we already to day-to-day. It’s just another tool in our arsenal and that’s our job: to make sure our clients are properly mitigating their risks and then taking advantage of different financial vehicles, of which a captive is one of many.”
Plante describes group captives as a particularly good fit for agencies with larger books of smaller business or cases where similarities allow for observations to be made about areas that are ripe for assumptions of risk.
“When you’re able to align some of those financial observations with the right shared culture, there can be some good ways to create value for a community like that,” he says. “But my greater interest would be in single-parent captives or captives that are working more singularly for the ends and needs of a particular insured – maybe one that has good financial capacity and some operational complexity and the appropriate appetite for risk.”
A related area of exploration for the broker community involves enterprise captives, which he says provide benchmarks for what constitutes best practices in risk management that transcend routine P&C coverages.
“It’s really the audit community’s attempt to quantify and create a framework for best
practices and operational risk management,” Plante adds. “While aspects of operational risk management do not necessarily lend themselves to insurance, there are many
elements within that framework that are very well suited for assuming risk in a captive.”
Customizing Client NeedsIt all comes down to a client’s needs. “If you have a customer that each year is
running on really a tight margin and there’s not a lot of profit or excess cash, they might not be a great captive fit,” according to Grutt. He says ideal candidates will
have “a consistently profitable business and is looking for some additional planning opportunities for both risk transfer, maybe some asset protection, maybe some tax savings. Those would be the three components of why you would look at a captive.”
Since not all group captives are the same, Kunkle suggests that brokers focus on what’s most important to their clients. For example, while greater control might be a priority for some, others might prefer to be part of a mega-captive group with 300 insureds, which he says is almost akin to buying a mutual insurance company policy.
The latter approach shows that there could be tremendous strength in numbers. “Homogeneous captives tend to bring like-minded individuals together from construction, transportation, or warehousing” to reduce risk and improve losses over time, according to Kunkle.
There may be trends in the experience of larger companies that suggest the need for a contingency funding mechanism that isn’t available in the current market, which is where captives come into play. “Once you start to think in those terms, there’s far more susceptibility to those types of losses than most traditional brokers think,” Plante opines.
Taking the Long ViewThe trouble is changing the
mindset of employee benefit advisers who are concerned about the effect captives could have on their bottom line relative to other business insurance solutions. Plante sees “an enormous communication gap and missed opportunity in the industry in terms of recognizing the value proposition captive practice presents, because ultimately it is not at odds with the traditional brokerage model, but rather, complements a commission-based structure.”
38 The Self-Insurer | www.sipconline.net
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August 2015 | The Self-Insurer 39
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Brokers who fear losing commissions if they steer clients to captives should realize that these arrangements create such substantial value “they probably have earned fee income and a lifetime “bye on competition” by being such a valuable advocate, Plante observes.
Grutt acknowledges that captives involve an initial sacrifice or tradeoff for fellow agents, but such a move could pay off down the road in a number of ways. While a few percentage points may be lost along the way to increasing retention levels on traditional policies, he cautions advisers against adopting a myopic view about reduced commissions.
“There’s definitely concern that some of these newer ideas may jeopardize your existing book of business,” he says, “but I think you have to look in a mirror and say, ‘What is the alternative? If I ignore these new trends, what if somebody else brings them to my client? What does that mean?’ And that alternative might be worse for you.”
Grutt believes that keeping employer clients happy will not only retain their business, but also could lead to word-of-mouth referrals for advisers whose “reputation in the marketplace might trump any small lost revenue from one particular strategy. It just kind of gets back to what’s best for your client.”
Other key aspects of these arrangements that Kunkle says brokers
will need to examine on behalf of
their clientele is whether it would
make the most sense to establish
an on-shore captive in the U.S. or
offshore captive in the Cayman Islands,
Bermuda, Angola or other far-flung
parts of the world known for being
hospitable to these arrangements
from a taxation standpoint.
But there also could be
misconceptions. For example, he
notes that offshore captives have to
pay federal excise taxes if they’re part
of the premium and income must
be reported back to shareholders
through a Form 5471. He also
mentions that “there are no real tax
filings that need to be done for a
953(d) election because the captive
would file a U.S. tax return.”
Captives are admittedly esoteric
and complex, as well as counter-
intuitive to think about. Forming an
insurance company for a limited
application is out of reach for a lot
of companies; they’re certainly not
for everyone, according to Plante.
“But in the right circumstance for the
appropriately capitalized company
with the right appetite for risk with
the right operational complexity,
it’s just a tremendous and powerful
tool,” he adds. ■
Bruce Shutan is a Los Angeles freelance
writer who has closely covered the
employee benefi ts industry for more
than 25 years.
P&C group captive programs
represent a growing market
segment with significant business
opportunities for employee
benefit brokers and advisers,
according to the description of
an educational workshop at SIIA’s
35th Annual National Educational
Conference & Expo on October
18-20, in Washington, D.C.
The session, “What Brokers
Need to Know About Property
and Casualty Group Captive
Programs,” is one of three
sessions on captives tailored to
the broker community. An entire
educational track on captives will
feature eight of the conference’s
40 sessions at the world’s largest
event focused exclusively on the
self-insurance/alternative risk
transfer marketplace.
Speakers will include Peter
Gernold, SVP of First Niagara
Captive Group, Lynne Bailey, area
President of central California
for Arthur J. Gallagher & Co. and
Jerry Ouimet, a broker with Cobb
Strecker Dunphy & Zimmerman.
SIIA NATIONALEDUCATIONALCONFERENCEon P&C GROUP CAPTIVES