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 riskletters@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

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.