Captives

All For One or One For All

There are several aspects to consider before opting for a single-parent or group captive.
By: | November 2, 2015 • 8 min read

Perhaps the most important decision any risk manager faces when choosing a captive program is whether to select a single-parent or a group captive.

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A single-parent captive (SPC) is set up exclusively by an organization to insure against its own risks. The insured owns the captive and is therefore only liable for its own risks.

A group captive, on the other hand, is formed by a group of insureds that band together to share their risks. Each organization is an owner of the captive and thus shares in its profits and losses.

The benefits of a captive from an insurance perspective are obvious — to have greater control over your insurance program and to reduce your insurance costs in the long run.

In its August report, A.M. Best found that captives continued to outperform the commercial sector in most key financial measures.

But before deciding on the right captive, companies must first consider a host of factors including the size of their business, the industry they are in and their risk appetite, and ultimately whether they want to go it alone or be part of a large group, and the advantages and disadvantages each brings.

“The key question you have to ask yourself,” said Dennis Silvia, president of Cedar Consulting, “is whether I can do this on my own or do I need other people to come on board with me?”

Single-Parent Captives

The argument in favor of SPCs is a strong one. SPCs have consistently outperformed the commercial insurance market and the overall captive sector over the last few years, according to A.M. Best.

“This focus and discipline on writing coverage where the SPC is only responsible for its parent’s risk, and not mutualizing risks or paying losses for third parties, is another key factor in SPCs outperforming both A.M. Best’s commercial market composite and captive composite,” said the ratings agency.

David Gibbons, captive insurance leader, PwC Bermuda

David Gibbons, captive insurance leader, PwC Bermuda

Such has been the growth of SPCs that between 2010 and 2014, the surplus in U.S.-domiciled SPCs increased by 33 percent, to $9.2 billion, while the amount of dividends paid during that period was a staggering $1.9 billion, said A.M. Best.

An SPC is an attractive option for any company with a highly specialist or unique class of business that doesn’t fit into a group program, or one that doesn’t want to share risk or any of its private financial information with others.

“The type of companies that set up SPCs are typically Fortune 500 multinationals looking to expand their risk management function, who have a loss experience better than the market and/or want access to the reinsurance market,” said David Gibbons, PwC Bermuda’s captive insurance leader.

Advantages of an SPC

One of the key advantages of an SPC is flexibility, with the captive owner in full control of all operational aspects, including lines of coverage and limits, as well as choice of service providers and domicile.

And because there is no risk-sharing, the company has greater control of its risks and doesn’t have to pay someone else’s claims, as in a group situation.

On the flipside, the captive owner is 100 percent responsible for any losses.

“With an SPC you can create your own business plan to define how much risk and the coverage you are going to have, and change that on an annual basis, without the need for agreement with other parties,” said Chad Kunkel, captive services division executive vice president at Artex Risk Solutions.

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Chad Kunkel, captive services division executive vice president, Artex Risk Solutions

“And because you are only insuring yourself, you don’t need to worry about any potential losses from sharing with other insureds that may arise in a group situation.”

Another benefit is that any surplus made can then be used to address the client’s immediate needs, such as increasing retentions, insuring new lines of coverage, or reducing future premium requirements.

Added to that, said PwC’s Gibbons, is the faster speed to market of an SPC than a group program because there is only one party making the decisions.

“Group captives, however, need to find other companies with a similar risk appetite and outlook to band together with, to agree on the level of risk they are going to put into the captive, as well as how they are going to share the profits and losses,” he said.

Group Captives

Group captives, on the other hand, appeal more to companies whose premium volumes are not big enough to warrant owning or operating their own SPC.

Similarly, they are likely to suit a company involved in a non-high-risk class of business or that is looking for pre-defined lines of coverage, such as workers’ compensation, general liability and auto liability.

While autonomy is central to SPCs, a key feature of a group captive is the pooling together of resources, enabling smaller to medium-sized companies to join together to share their risks, as well as profits and losses.

“Group captives tend to be formed by medium to small enterprises, like a car dealership, for example, that don’t have the economies of scale or the size of premiums or assets to be a meaningful player in the reinsurance market,” Gibbons said.

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“To get that, they need to band together with other entities with similar risks in order to take advantage of the reinsurance market, to achieve lower costs on rates and to build up a big enough portfolio of assets.”

Peter Willitts, vice president of the Bermuda Captive Owners Association, said that because of its structure, it’s key that the guidelines of a group program are established at the outset.

“You have got to make sure that all parties are as committed to risk safety as you are and that they can live up to their financial obligations. Because the last thing you want is somebody to walk out on you after landing you with a big loss,” he said.

“Ultimately, everybody wants cheap insurance and to turn a profit, but at the same time you also need to hold back enough capital for the bad times.”

If you can find the right fit though, Artex’s Kunkel said, joining an established group captive has the advantage of being able to tap into the resources and expertise within that program, which are not necessarily available through an SPC.

“If you fit into the group captive model, long-term I would say it’s the best way to take advantage of the group purchasing, tax deductibility and risk management opportunities that it provides,” he said.

The Case for a Group Captive

Among the most attractive features of a group captive is the ability to spread costs among the various captive owners and thus reduce your own management and administration fees.

“Because all the members are like-minded individuals, everyone is pulling in the same direction — they want to control their losses and to do the right thing from a risk management perspective,” said Nick Hentges, whose company Captive Resources manages 31 group captives worth $1.7 billion in gross written premium.

Added to that, the capital requirements you have to put up are usually lower, Kunkel said.

“Your collateral requirements from an insurance carrier are typically lower in a group captive than they would be on your own because you are part of a group sharing some of that risk,” he said.

“Because all the members are like-minded individuals, everyone is pulling in the same direction — they want to control their losses and to do the right thing from a risk management perspective.” — Nick Hentges, president,  Captive Resources

Because of the mass purchasing power of the program, reinsurance and services can also often be obtained at a fraction of the cost of doing so individually.
Group captives also offer ease of entry and a one-stop solution, they are structured to be tax efficient and often only require a nominal fee to join.

In addition, overall claims experience can be predicted with a higher degree of certainty than in an SPC, leading to improved loss forecasting, while there is an increased emphasis on loss control because of the risk-sharing element.

And with adequate capitalization, they allow members to retain higher levels of risk than they would otherwise be able to do on their own.
Disadvantages of groups

One of the biggest challenges of setting up or joining a group program is finding a group of companies with a similar risk appetite because they all have their own agendas, Gibbons said.

Those may include different retention and coverage needs, particularly if they operate in different areas of the country, are of varying sizes and have different ownership structures (publicly owned vs. privately held).

“When you enter into a group captive, you not only have to understand your own loss experience but also that of the other entities in that captive and how you mitigate against such exposure,” Gibbons said.

Sean Rider, managing director at Willis Global Captive Practice, said that in some cases companies don’t feel comfortable sharing other people’s risks.

“The first question I always ask a prospective client is, ‘Do you feel comfortable with taking on other people’s risks?’ ” he said.

“This is because you are entering into an environment where your contribution to the pot is exposed to other people’s activities and their contribution is exposed to yours.”

The distribution of underwriting profits and earnings can also be a bone of contention among members.

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Being in a group captive also means it’s harder to change levels of retention and coverage than in an SPC because you have to get agreement from all parties, Kunkel said.

“The main challenges when setting up are data collection, making sure you have the critical mass and being able to take on any claims that may occur on an annual basis,” he said.

Hentges believes the relatively untapped resource of middle market companies means that the possibilities in the group captive space are almost limitless.

“We have about 3,400 clients right now, but we think there are somewhere between 20,000 to 25,000 middle market companies that we can go after, so there’s a tremendous amount of scope for the group concept, regardless of the overall market environment,” he said.

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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]