Why Vermont Captives Are a Natural Fit for Weathering Property Insurance Storms

For companies facing expensive and hard-to-insure property perils, captives offer flexibility and price stability.

By: David Agnew | May 16, 2024

It’s been an interesting few years for the property insurance market, to put it mildly. Inflation, climate change, the transition to sustainable energy and shrinking capacity in reinsurance markets have all contributed to rising premiums; McKinsey puts the increase at between 6 and 8% for each year since 2018 across all global P&C lines, and most property lines in the U.S. have seen even sharper spikes.

This volatility has prompted some carriers to pull out of certain markets entirely. Seven of the largest home insurers have scaled back or stopped insuring homes in California, largely due to wildfires; major carriers have scaled back or pulled out of Florida due to hurricanes; and Louisiana faces a crisis as carriers cut capacity after a series of floods and hurricanes dating back to 2020.

“Usually, businesses are coming to us with a problem,” said Eric Funk, captive senior accounting manager at NFP’s Risk & Insurance Strategy Collective (RISC). “Right now, that problem tends to be property, because they’re seeing a cutback of capacity in the market. And they’re seeing huge increases — double digits, up to 30%.”

But with a captive, Funk said, “you can start building capital up to then use as a risk management leveraging tool, because once you have it set up, you can even use it to cover risks that are now being excluded — like CAT coverage, whether it’s hurricanes in the Gulf Coast or earthquakes in California.”

Jonathan Spencer, assistant chief examiner, State of Vermont’s Department of Financial Regulation Captive Insurance Division

Jonathan Spencer, assistant chief examiner with the State of Vermont’s Department of Financial Regulation Captive Insurance Division, agreed: “More and more people are seeing the potential benefits of a captive program. Especially in a hardening market, you’re no longer at the total mercy of the commercial market.”

Property and captives are a natural fit, according to Steve Bauman, global programs & captives director, Americas, AXA XL. “Companies have a long history of using their captives for property,” he said. “When a hard market comes about — and we’re in the throes of a hard market — that’s the perfect opportunity for insureds to use their captive for property.”

Smoothing the Road Ahead

There are several ways captives can help risk managers improve their property programs, and naturally, cost is chief among them. By avoiding the wild swings in capacity and pricing in the traditional market, captives confer a degree of consistency.
This is especially true where carriers are pulling out of markets.

“A lot of capacity that’s come into the marketplace in the last several years is captive utilization,” Bauman said. In previous hard cycles, he explained, “new insurance companies and new capital came pouring into the market. This one has been a bit different … This [hard cycle] seems a bit more muted in terms of new entrants. But what you have seen is the stepping up of captive utilization to fill that void.”

And, over the longer term, these captives can achieve their ultimate goal: lower premiums. By creating a vehicle in which to retain risk, captives give companies an alternative to paying whatever the traditional market demands.

TJ Scherer, VP of Spring Consulting Group

“You now have leverage with the market, because you aren’t relying solely on the market,” said TJ Scherer, VP of Spring Consulting Group. “You could say, ‘At this price, I will transfer the risk. At this price, I will not.’ You’re leveraging your captive as a new retention vehicle — and you may not do that in year one or year two, but over time, it becomes part of your overall strategy and leverage with the market.”

In fact, “leverage” is the watchword for property captive use, giving risk managers the flexibility to choose which risks to retain and where, generating savings and even profit.

Fits Like a Glove

For instance, when carriers respond to unexpected catastrophes by introducing large exclusions or buydowns, captives are able to retain that risk and keep properties in compliance. If a solar farm faces a wind exclusion following a string of claims, for instance, a captive can step in to fill that gap.

Theresa Severson, VP of insurance & risk, Kite Realty

Theresa Severson, VP of insurance & risk at Kite Realty, a large REIT, explained that “40% of our portfolio is in wind Tier 1, so hurricanes are a definite exposure for us. But we also face convective storms.” As a result, she said, “I look at our philosophy as being captive-centric, always starting captive-forward. But we also will react to what the market is offering. Our modeling shows us where we have expected losses, and when I look at the premiums they’re offering in the standard market, if it makes sense to buy it through a third party, then we’ll go that way. If what they’re offering us from a coverage and pricing standpoint doesn’t make sense based upon my modeling, then I’ll put it into the captive and manage it that way.”

Captives also offer the advantages of hands-on attention and speedier outcomes, some of which are due to the domicile in which they’re licensed.

“Vermont is very easy to work with,” Severson said. “They’re understanding. They respond very quickly to questions. I’ve always had a really good working relationship with Vermont.”

Skin in the Game

As companies with a captive realize savings, they often undergo a change in culture as well: No longer can they simply pay their premiums and expect an insurer to take care of whatever claims may arise. Rather, risk engineering becomes a way to grow a surplus of funds, and even potential dividends.

Steve Bauman, global programs & captives director, Americas, AXA XL

“There’s greater motivation to try and curb [loss],” Bauman said, and that money can then be reinvested into property resilience. “Many captives loan money back to their parent,” Bauman explained, “and that money can then be used to enhance loss-control efforts. If a risk manager knows they have some significant funds in their captive, they can, for example, put sprinklers in a building that didn’t have them. [That’s] a great benefit where budgets are tight.”

And the ways to predict and prevent property losses are endless: investing in flood barriers and sensors, RMIS and software to parse risk data, to name just a few.

“You can use the funds that your captive has built up to help fund some of those loss-control initiatives, if it’s something that impacts the overall loss ratio for the captive,” Severson said. “We have a system called Hail Alert that will send us notifications of hail events that happened at any of our centers and tell us the size of that hail … We can then go ahead and be proactive, see if there’s any damage, and make any repairs that we need.”

For risk managers trying to build resilience measures into a budget, a captive can help higher-ups see the benefit of a proactive approach. It can also ensure they’re part of the conversation in the first place.

“Having a captive gives me a seat at the table when it comes to the C-suite and even the board, because I’m reporting to our board with regards to the captive and how it’s operating. It’s a way of putting a bigger lens on your risk initiatives,” Severson said. “When you have that skin in the game, it is much easier to get buy-in for different safety initiatives, loss-control initiatives or risk management initiatives within the organization, because we really are talking about our own money.”

It can even help get buy-in from the front lines: “It’s a little bit different when you’re talking to the boots-on-the-ground people, the property managers, and explaining to them that this is our money,” she added.

A Journey Begins

Eric Funk, captive senior accounting manager, NFP’s Risk & Insurance Strategy Collective (RISC)

They say the best time to plant a tree was 20 years ago, but the second-best time is now. The same is true of starting a captive: Companies whose captives are fully mature will be gratified they have options when navigating today’s property insurance market, but for those still facing rising premiums and exclusions, it’s never too late. And because captives aren’t a one-size-fits-all solution, they can start small and grow over time, helping to address a company’s ever-shifting pain points.

“Taking on more risk is when the captive builds and builds,” Bauman said. Eventually, “captives get to a point where they can take on volatility. It’s got to be very measured, and captives have to lean on their partners.”

In this, there’s no better partner than Vermont.

“They have the depth. They have the expertise. They have the legislation,” Funk said. “They’re the biggest and best in the world for a reason.” &

David Agnew is an editor based in Philadelphia. He can be reached at [email protected].

The Qualities to Look for when Selecting a Financial Lines Carrier

Operating a business comes with its share of challenges, but having an insurance partner that strives to understand and align with your operations can make all the difference.

By: MSIG USA | October 31, 2024

Running a commercial business is no small feat. Leaders are often tasked with making difficult decisions — sometimes with limited data — and communicating these decisions with confidence while acknowledging their inherent uncertainty.

“Expectations are incredibly high in today’s current climate,” said David Guild, head of financial lines, MSIG USA. “Companies and their leaders must be thoughtful and controlled in their communications, conveying both competence and a clear vision on an ever-evolving world stage.

Nevertheless good leaders (whether they are in the C-suite or on the board of directors) consistently persevere and face the challenges of our evolving world, equipping themselves with the necessary tools and techniques to keep operations running.

For financial companies and commercial businesses looking to keep pace with today’s risks and better understand their own exposures, finding the right insurer need not feel like an added weight.

Below are several qualities to look for in a partner that has the experience and insights to help mitigate and navigate their insureds’ unique exposures, giving leaders the space to focus on their core operations.

Sustainability in All Markets

David Guild, Head of Financial Lines, MSIG USA

When looking for a financial lines insurance partner, sustainability should be top of mind. Knowing that an insurer can provide solutions in a hard market alongside the soft will not only provide peace of mind but also help build resilience.

“Leaders should have the room to concentrate on their vision for the company and what it can achieve — not be burdened by potential risks that keep them awake at night. “Your insurance partners should be able to understand the trials and tribulations of running a business, to respect that there is no single right answer to most challenges, and be prepared to assist wherever, whenever issues may arise,” Guild said.

Sustainability is proven in an insurer’s ability to come through on the promises it makes. For example, MSIG USA’s approach has earned it an A+ rating, proof that its team can back the promises it makes and see them through to completion. “We are confident in our ability to serve your insurance needs, on a global scale,” Guild added.

“Everything we speak of revolves around the credibility of our platform, which is reflected in our A+ rating, a 350-year legacy within our family of companies, and our experienced team here in the U.S.”

An Emphasis on Company and Culture

Successful partnerships are built on a solid relationship between insurer and client.

At MSIG USA, “we aim to be a stable and sustainable presence for our clients,” Guild said. “The value of long-term relationships is at the core of what MSIG USA is all about. Our underwriters deeply appreciate the importance of these connections.

“We believe that building and maintaining strong, long-lasting relationships with our customers is essential to navigating the inevitable fluctuations of the insurance market. We are confident in our abilities, and in yours.” he added.

Company culture, as Guild mentioned, is more than an internal commitment; it’s something that can also drive business relationships.

For insurance partners, analyzing and aligning with their clients’ culture helps to solidify partnerships, as well as open the lines of communication and understanding.

“Variables will change, oftentimes rapidly. From our view, what matters is the culture of that company when responding to change. It’s about trusting their character rather than just the policies and procedures in place,” Guild said.

A Source of Truth and Clear Communication

Effective communication goes a long way in clearly understanding an insured’s business and future potential. This allows for sustainable partners to develop coverage that fits and to work closely with their Claims team to understand the partnership in context.

With the amount of data available today, and the number of ways information can quickly be disseminated through different medium, a good insurance partner knows that companies must be the single source of truth for their stakeholders.

“Quarterly and annual earnings calls provide a platform to discuss financial results and respond to investor questions. Investor presentations offer a more comprehensive overview of the company’s strategy, performance and outlook,” Guild explained.

We will look at what analysts and other third parties think about the information provided to try to glean what the investor base will think and how they will act. But ultimately, it is what the company says, and the way they say it, that we will assist in defending, if need be, and so we make sure to listen and learn from the company leadership.

Bringing These Qualities Under One Roof

Leaders want to know that, at the end of the day, their business is a priority for their partners.

Clear communication, a strong relationship and emphasis on sustainability are just the start. Their insurance partners should strive to understand their business, identify areas of concern and craft coverage customized to meet their needs.

With an impressive 350-year legacy, MSIG USA is doing just that for its clients, utilizing its global presence to further its clients’ goals.

“The key elements of our approach are an intellectual pursuit of information, a well-honed practice of underwriting that identifies material aspects for risk assessment, and clear communication of our insights to our clients: brokers and buyers alike. We aim to provide a transparent and informed perspective on the risks we underwrite,” Guild said.

“We bring sustainable, predictable insurance capital and what we believe is best in class service philosophy, honed by working with some of the most sophisticated brokers and buyers of insurance in the world.”

To learn more, visit: https://www.msigusa.com/financial-lines/.

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

MSIG North America is a member of MS&AD Insurance Group Holdings, Inc. which is the 8th largest non-life insurance group in the world by revenue. Based in Tokyo, Japan, we operate in 48 countries/regions and generated $46B in 2021 with approximately 40,000 employees globally. MSIG North America is the marketing name used to refer to MSIG Holdings (U.S.A.), Inc. (“MSIGH”), and its subsidiary companies.