Rising Above the Insanity: Captive Insurance Isn’t Just for the Private Sector, Public Entities Benefit Too

By: | February 14, 2022

James Curbeam, CPCU, ARM, AIC, is the director of risk management for the Las Vegas Valley Water District. He holds a B.S. in finance from Creighton University and an executive MBA from the University of Nebraska Omaha. James has served in the following industry leadership roles: President, Nevada Chapter of RIMS; President, Nebraska Chapter of RIMS; and President of the Las Vegas CPCU Society. James is also a founding member of the American Association of Water Distribution & Management, which was formed as a Thought Leadership Lab for risk management in the water industry. He also was named the 2019 PRIMA Risk Manager of the Year. James can be reached at [email protected]

“Insanity is doing the same thing over and over and expecting different results,” is usually attributed to Albert Einstein.

“It’s hard to win an argument with a smart person, but its damn near impossible to win an argument with a stupid person,” is commonly credited to Bill Murray.

Stupid refers to someone who does not understand things, has not learned from past experiences, and generally is not using his or her brain.

These two quotes perfectly describe the world we are living in today.

How do these quotes represent our present-day world? Society continues to do the same things repeatedly, expecting different results while not using our brain and learning from past experiences.

For example, let’s start with politics. The country is politically divided, and each party criticizes the other party for doing the exact same thing. Regarding diversity, equity and inclusion, the same decisions made 30 years ago are still being made today in a lot of cases and as a society we are not learning from past experiences.

Risk managers do not have the luxury of being able to live according to the above paradigms.

We must rise above this insanity and stupidity to meet the challenges of today’s world if we want to successfully navigate our organizations through these difficult times.

The modern risk manager must learn from past experiences.  For instance, as the insurance market continues to harden and become unpredictable, those who continue the insanity of just blindly renewing policies without investigating other options will always be reactive and a prisoner to the whims of the market.

In some cases, such as cyber insurance, you may find yourself unable to purchase coverage at all.  So, what can we do as risk managers to rise above the insanity?

Investigate the captive insurance alternative as an option for financial risk transfer.

This is not just an option for the private sector but can be extremely effective for public entities as well. In the Marsh Captive Landscape Report dated September 2020, by industry, public entities represented 2% of captives.

A captive is a legal entity informed to insure the risk of a parent company.

It is a formalized way of allowing businesses to take on more of their own risk. It still is a type of self-insurance but transfers the risk of loss from the parent to the newly formed insurance entity.

Examples of reasons of why to form a captive include the following:

  • Gain better control over insurance and risk financing cost
  • Increased negotiating power with the commercial market
  • Risk management and claims control
  • Insure risk the current market is overpricing
  • Access to the reinsurance market
  • Ability to loan back surplus cash to parent
  • Opportunity to profit from your own underwriting experience
  • Cover risk not being covered by commercial market
  • Ability to access federal programs offered to insurance carriers

To get started, the process is relatively simple and begins with a feasibility study.

This process includes evaluating your risk tolerance, determining a structure, what insurance coverages you initially want to offer in the captive, where the captive would be domiciled, a financial analysis based on your loss experience and concludes with a recommendation.

A captive is a flexible long-term strategy to enhance your risk management program.

Today, risk managers continue to struggle with trying to maintain the appropriate coverage we need to protect our organizations from loss at a reasonable price. Analyzing the benefits of a captive is a great option for risk managers who want to rise above today’s insanity and stupidity relative to dealing with today’s insurance market. &

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