Insuring Risks Beyond the ‘Frontera’: Mexican Companies Consider the Advantages of Captive Insurance — Via Vermont

Vermont captive regulators and advocates journey to Mexico as part of a push for more international business for the domicile.

By: Alex Wright | May 26, 2023

Demand for captive insurance in Mexico has risen exponentially over the past 12 months, as the country’s businesses face a hard market in some lines.

That interest was stoked in March, when the State of Vermont and the Vermont Captive Insurance Association (VCIA) sent a delegation of government, regulatory and industry representatives, including members of the U.S. Department of Commerce’s U.S. Commercial Service, on a trade mission to Mexico City to raise awareness of captive insurance as a risk management solution and Vermont as a domicile.

Organizers of the meeting, which was originally scheduled for March 2020 but had to be delayed due to the COVID-19 pandemic, were buoyed by the event, which attracted 85 attendees, and they have already heard from Mexican companies looking to form a captive in Vermont.

Among those present were brokers and government and trade body representatives from the likes of manufacturing associations, who attended panel discussions and networking opportunities. During the event, they learned about the basics of captive insurance companies, reasons for their formation, the feasibility assessment process and the steps involved in putting a successful program together.

“We knew that Mexico was ripe for captive insurance and that the demand was there,” said Sandy Bigglestone, deputy commissioner for the State of Vermont’s Captive Insurance Division.

“The key for us was getting access to brokers and company decision-makers and educating them about the key benefits of forming a captive in Vermont.”

Raising Awareness of Captive Insurance

Bigglestone said that, despite a level of awareness among brokers about captive insurance, some attendees were still surprised to hear about the maturity of the captive industry and Vermont’s standing as a leading domicile. But by presenting them with facts and figures supporting their case, she said, they were able to build greater awareness and dialogue.

Sandy Bigglestone, deputy commissioner, Captive Insurance Division, State of Vermont

Interest in and uptake of captives by Latin American companies generally has increased in recent years, and more are doing their own research into formations, attending conferences and industry events and sitting on panels. The demand for captives has been driven by hard insurance markets and the need for greater capacity and loss control.

In Mexico specifically, there are a host of industries interested in captive insurance, ranging from manufacturing, property development, banking and financial services to energy, transportation and telecommunications. The most in-demand risks they are looking to insure are property, health care, financial lines and cyber liability.

“Mexico’s insurance marketplace has a lack of capacity,” said Bigglestone. “That makes captives the ideal solution to fill those gaps and enable companies to better control their premiums and risks.”

Vermont already has two Mexican captives on its books. The first is for América Móvil — Latin America’s largest telecom operator, which was formed in 2008 — a representative of which spoke at the event. The other was established late last year.

It has also gained two new prospects: One has already carried out a feasibility study, and the other has expressed an initial interest in forming a captive.

Vermont as a Natural Fit

Given that the U.S. is Mexico’s largest trading partner and is in a similar time zone, and that many Mexican companies have multiple risks they need to insure in the U.S., Vermont is a natural fit as a captive domicile for those businesses. And because of the lack of specific captive insurance laws and the complexity of forming a captive in Mexico, companies based there are forced to look further afield.

“The Latin American market is greatly underserved when it comes to insurance,” said Kevin Mead, president of VCIA.

“Unlike Europe, there are few captive insurance options in the region, so Vermont’s experience in dealing with captive formations for non-U.S. entities and the comparatively open market makes it a good fit.”

Mead said that, previously, captives had only been used as “tax shelters” for high-net-worth individuals, rather than by corporations looking to fulfill an insurance need. So when the Mexican companies learned that they could use a captive as a risk management tool, that grabbed their interest.

“I have already had people calling me up asking who at the State of Vermont they should be contacting for preliminary discussions about forming a captive,” said Mead. “It’s early days, but the interest is certainly there.”

Many of the attendees at the Mexico City event plan to attend the VCIA Annual Conference in August to learn more about Vermont as a domicile and to meet with service providers on the ground. Vermont will also be running a series of webinars to keep them abreast of the latest developments in captive insurance.

Positive Feedback

Among the organizations represented at the March event was the National Council of the Maquiladora and Export Manufacturing Industry, a Mexican group that represents more than 1,300 global companies that are beneficiaries of the IMMEX program, which enables foreign companies to operate in the country under a preferential low-cost tax structure and comprises 62% of Mexico’s total exports.

Its general director, Susana Duque Roquero, commended Vermont for its work in raising awareness of its captive insurance offering to the Mexican market.

“The presentation and business breakfast of ‘strategic advantages of captive insurers’ in Mexico City provided a broad overview about the captive insurance industry with experts that encouraged discussion about the strategic advantages,” Roquero said.

“It was a very necessary first approach for many of us, because we are more familiar with the traditional insurance schemes.

“The decades of experience in financial, insurance and regulatory matters, as well as their CPAs and certified financial examiners, gives the State of Vermont a plus in considering them as one [of] the leading captive insurance domiciles,” Roquero added.

“Our export manufacturing industry could benefit from considering a regulated form of self-insurance that is created, owned and controlled by its insureds. The most attractive thing is the control and management of their own risks.” &

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

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.