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2017 Vermont Report

Vermont Eyes Agency Captives

An agricultural consortium is one group taking a serious look at forming an agency captive in Vermont.
By: | April 7, 2017 • 6 min read

Agency captives have become increasingly popular in recent years, with more and more large associations with hundreds or even thousands of members looking to insure themselves.

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Vermont, the leading domestic captive domicile, is currently working on legislation to allow them and could see it approved in a month.

An agency captive is essentially a reinsurance company owned by an insurance agency or brokerage that works through an agreement with a fronting carrier, whereby the captive receives a share of all premiums written and retains any investment income, but in return it has to pay a portion of the claims.

Most agency captives write business owner policy, package, general liability, errors and omissions, workers’ compensation and auto liability.

The concept of an agency captive or producer-owned reinsurance company (PORC) is nothing new; they have been around for several years, but few domiciles were willing to register them after they came under scrutiny from the Internal Revenue Service (IRS) and other regulators.

The problem was that under the PORC structure, producers could recommend a particular policy to a client because it generated an underwriting profit for its company rather than being the most suitable policy for that client.

David Provost. deputy commissioner, Captive Insurance Division, Vermont

It also allowed the producer to cherry-pick the best risks for its own PORC and offload the poorer risks to other carriers, as well as the model being used in fraudulent schemes.

“That’s why we will have a clear preference for an agency/producer that is working with program business and/or is owned or affiliated with the ultimate buyers, such as an association or other homogenous group of risks,” said David Provost, deputy commissioner for Vermont’s Captive Insurance Division, who tabled a proposal to register agency captives in a captive bill in January.

“Our proposal limits this to commercial insurance business — we are not likely to see heterogeneous risk being placed.”

Vermont Launch

The bill has already received the green light from the House Committee on Commerce and Economic Development, but it is still awaiting approval for a tax credit included within the bill from the Ways and Means Committee. Provost, for one, doesn’t anticipate any problems.

“I don’t anticipate that we’ll have any trouble getting it passed before the legislative session ends in May.” — David Provost. deputy commissioner, Captive Insurance Division, Vermont

“This year we decided to put forward a proposal to make it law in order to open the door to potential business,” he said.

“I don’t anticipate that we’ll have any trouble getting it passed before the legislative session ends in May.”

Similar to a group captive, instead of being owned by the group members, it is owned by an insurance agency such as an MGA or a program administrator, and the group business is placed with an insurer backed up by the captive as a reinsurance company, said Provost.

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“That is exactly the kind of business that we are looking for — a group program with a captive to share and participate in the risk, and potentially the profits, as well as sharing best practices and other risk mitigation strategies,” he said.

“This should achieve a virtuous cycle where the group drives down costs, in turn generating profits which can then be returned to its members in the form of either a dividend or put back into cost control.”

“Working closely with our members we are able to better understand and mitigate against the risk, which ultimately helps control claims costs.” — Jan Klodowski, vice president at Agri-Services Agency

Provost said that, if granted approval, an agency captive would also be regulated in the same way as a group captive; required to provide an annual statement, actuarial review and audited financials, as well as undergoing a thorough review of its forms and contracts to ensure the policy is fit for purpose.

“The key to an agency captive is to ensure that there is full disclosure of all business placed to the members that are paying the premiums, and that they get the full benefit of the captive,” he said.
“In the case of the group captive, if it is generating a profit it is important that this is applied to the captive’s risk management strategy to drive down costs.”

Provost said that since announcing the proposal, Vermont started receiving an uptick in interest in agency captives.

“I don’t expect it will be a flood of applications, but we are probably going to see one or two a year.”

Provost added that an agency captive was perfect for large associations with difficult to place risks such as agricultural risks.

“It’s a lot easier to place that kind of risk if you have 500 or 1,000 policyholders than one or two,” he said.

“If you have got volume and a premium and it can be turned into something that is mutually beneficial and profitable for both the members and the insurer.”

Association Application

Agri-Services Agency (ASA), a wholly owned subsidiary of Dairy Farmers of America, formed more than 30 years ago to provide affordable insurance programs to its thousands of members and affiliated agricultural producers before being changed to a sponsored cell captive, similar to the agency captive model.

ASA started the Agrisurance Inc. captive in Vermont to provide consistent workers’ compensation for agricultural production companies that were struggling to secure coverage and was quickly extended to supporting businesses.

It’s considering moving to the agency captive model if and when Vermont legislators approve the structure.

Jan Klodowski, vice president, Agri-Services Agency

“We knew that we had to reach a broad group of people and we wanted to be able to stabilize the pricing as well as have a consistent workers’ compensation program available for agricultural production and agricultural types of business,” said Jan Klodowski, vice president at Agri-Services Agency.

“To our members our program looks like a traditional insured’s, but we don’t have the same fluctuation in pricing even though we follow the state recommendations.

“And because we have that pricing flexibility we have been able to work with our members more effectively in investing the money back into developing safety programs.”

Klodowski said that at the time of setting up the captive, Dairy Farmers of America opted for a model that it could understand and favorably predict where its losses were going to be and price accordingly.

During the good years, any profits made were plowed back into value-added services for the program and into expanding the captive’s loss control team of agricultural experts, she added.

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The captive, which had an underwriting combined ratio of 87 percent at the end of 2016, also has a claims manager and analyst onsite, said Klodowski. “When we have catastrophic losses as a result of serious accidents, we work closely with the employer and employee concerned to provide them with access to the best medical care.”

“Working closely with our members we are able to better understand and mitigate against the risk, which ultimately helps control claims costs.”

Gary Osborne, president of USA Risk Group, whose company has managed many agency captives and who advocated for agency captives for Vermont more than 10 years ago, said that from his experience, the most successful ones were individual agencies with a niche that allows for customization and specialized cover that forms a market.

“Specialized programs should be the target,” he said. &

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2017 Vermont Report

A Perfect Fit

Life Time Fitness finds a captive home in Vermont.

Eight Questions for Dan Towle  

Risk & Insurance® speaks with Dan Towle as he departs from his long tenure as director of financial services for the State of Vermont.

 

 

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Manufacturing

More Robots Enter Into Manufacturing Industry

With more jobs utilizing technology advancements, manufacturing turns to cobots to help ease talent gaps.
By: | May 1, 2018 • 6 min read

The U.S. manufacturing industry is at a crossroads.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

“The risks associated with this are broad and span the entire value chain — [including]  limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]