Risk Insider: Martin Eveleigh

Captives and Risk Pooling: An Overview

By: | January 13, 2017 • 2 min read
Martin Eveleigh is Chairman of Atlas Insurance Management, which he formed in 2002. He specializes in designing alternative risk transfer programs – particularly risk pools – and captive structures. He can be reached at meveleigh@atlascaptives.com.

Increased interest in captive insurance across a spectrum of industries has led to recent growth in captive insurance company formation. Leading the surge are middle-market organizations who see captives as an attractive option that can complement their existing commercial insurance programs.

Sharing Third-Party Risk

Setting up a captive can be an option for managing risks, particularly those not addressed by commercial insurance, but organizations must understand the requirements necessary for a company to be recognized as a bona-fide insurance company.

One requirement is the need for risk distribution. Enough independent risks of unrelated parties must be pooled to invoke the actuarial law of large numbers. Distribution of disparate risks is one requirement by the IRS for the captive to be considered an insurance company for federal tax purposes.

For small to middle-market companies, it can be difficult to satisfy this requirement within their own insured programs. However, there are options available to the captive owner. One popular method is to participate in a risk pool which provides a reinsurance structure where risks of a number of captives are blended and shared.

Participants pay a portion of their direct written premium to the pool to buy reinsurance. They then assume an equivalent amount of risks from fellow participants. This concept has been underscored in IRS Revenue Ruling 2002-89, a safe harbor rule stating that captives with at least 50 percent of premiums from third parties satisfies the requirement for risk distribution.

Risk Pool Governance and Control

In addition to risk distribution at the individual level, best practices dictate that risk pools employ governance and control protocols to ensure structural stability and financial integrity. These include: providing timely and accurate reporting, demonstrating underwriting control with new and renewing participants, and maintaining the overall financial strength of the pool.

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The risk pool must be independent, or run separately from the members, including separate books and records. The focus of pool managers is to protect all participating members; no single member’s needs are to take precedence.

Risk pools also must demonstrate risk distribution. This requirement does not just fall on the individual member captive; the pool itself must meet the same distribution requirement by having a sufficient number of members and an even spread of risk among those members.

Guidance: The Key to Understanding

Risk diversification can mean that individual participants may assume risks they are not familiar with or do not fully understand. Furthermore, it is likely that participants may be unable to control assumed risks.

Strategies to mitigate this include creating a pool of low frequency risks where loss activity is low, or conversely, a pool of high frequency risks in which the exposure is more easily identified and less volatile. The potential for misunderstanding the downside of risk pooling underscores the need for an experienced adviser.

Members should understand benefits and obligations of participation, as well as how transactions within the pool are handled.

More from Risk & Insurance

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Risk Management

The Profession

This senior risk manager values his role in helping Varian Medical Systems support research and technologies in the fight against cancer.
By: | September 12, 2017 • 5 min read

R&I: What was your first job?

When I was 15 years old I had a summer job working for the city of Plentywood, mowing grass in the parks and ballfields, emptying garbage cans, hauling waste to the dump, painting crosswalk lines.  A great job for a teenager but I thought getting a college degree and working in an air-conditioned office would be a good plan long term.

R&I: How did you come to work in risk management?

I was enrolled in the University of Montana as a general business student, and I wanted to declare a more specialized major during my sophomore year. I was working for my dad at his insurance agency over the summer, and taking new agent training coursework on property/casualty risks in my spare time, so I had an appreciation for insurance. My dad suggested I research risk management for a career, and I transferred sight unseen to the University of Georgia to enroll in their risk management program. I did an internship as a senior with the risk management department at Sulzer Medica, and they offered me a full time job.

R&I: What could the risk management community be doing a better job of?

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We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks. If we initiate a collaborative exercise with the risk owners — people who may have unique knowledge about that particular risk — and include a cross section of people from other corporate functions, you can do an effective job of taking the risk apart to analyze it, figure out a way to manage that exposure, and then reap the upside benefits while reducing the downside exposure. That can be done with new products and new service offerings, when there isn’t coverage available for a risk. It’s asking, is there anything we can do to reduce the risk without transferring it?

R&I: What emerging commercial risk most concerns you?

Cyber liability. There’s so much at stake and the bad guys are getting more resourceful every day. At Varian, our first approach is to try to make our systems and products more resilient, so we’re trying to direct resources to preventing it from happening in the first place. It’s a huge reputation risk if one of our products or systems were compromised, so we want to avoid that at all costs.

We need to do a better job of saying yes. We tend to want to say no to many risks, but there are upside benefits to some risks.

R&I: What insurance carrier do you have the highest opinion of?

I’ve worked with a number of great ones over the years. We’ve enjoyed a great property insurance relationship with Zurich. Their loss control services are very valuable to us. On the umbrella liability side, it’s been great partnering with companies like Swiss Re and Berkley Life Sciences because they’ve put in the time and effort to understand our unique risk exposures.

R&I: How much business do you do direct versus going through a broker?

One hundred percent through a broker. I view our broker as an extension of our risk management team. We benefit from each team member’s respective area of expertise and experience.

R&I: Is the contingent commission controversy overblown?

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I think so. The brokers were kind of villainized by Spitzer. I think it’s fair for brokers and insurers to make a reasonable profit, and if a portion of their profit came from contingent commissions, I’m fine with that. But I do appreciate the transparency and disclosure that came out as a result of the fiasco.

R&I: Are you optimistic about the US economy or pessimistic and why?

David Collins, Senior Manager, Risk Management, Varian Medical Systems Inc.

While we might be doing fine here in the U.S. from an economic perspective, the Middle East is a mess, and we’re living with nuclear threat from North Korea. But hope springs eternal, so I’m cautiously optimistic. I’m hoping saner minds prevail and our leaders throughout the world work together to make things better.

R&I: Who is your mentor and why?

My Dad got me started down the insurance and risk path. I’ve also been fortunate to work for or with a number of University of Georgia alumni who’ve been mentors for me. I’ve worked side by side with Karen Epermanis, Michael Rousseau, and Elisha Finney. And I’ve worked with Daniel Dean in his capacity as a broker.

R&I: What have you accomplished that you are proudest of?

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Raising my kids. I have a 15-year-old and 12-year-old, and they’re making mom and dad proud of the people they’re turning into.

On a professional level, a recent one would be the creation and implementation of our global travel risk program, which was a combined effort between security, travel and risk functions.

We have a huge team of service personnel around the world, traveling to customer sites to do maintenance and repair. We needed a way to track, monitor and communicate with them. We may need to make security arrangements or vet their lodging in some circumstances.

R&I: What do your friends and family think you do?

My 12-year-old son thought my job responsibilities could be summed up as a “professional worrier.” And that’s not too far off.

R&I: What about this work do you find the most fulfilling or rewarding?

Varian’s mission is to focus energy on saving lives. Proper administration of the risk function puts the company in a better position to financially support research that improves products and capabilities, helps to educate health care providers and support cancer care in general. It means more lives saved from a terrible disease. I’m proud to contribute toward that.

When you meet someone whose cancer has been successfully treated with one of our products, it’s a powerful reward.




Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at ksiegel@lrp.com.