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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance

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The COVID-19 Pandemic: Opportunities and Implications for Captive Insurance explores the challenges presented by today's business and economic upheaval, as well as the hardening insurance market, and what it means for the captive insurance industry.

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Brokers Can Benefit from Captive Manager Partnerships in Hard Market

Partnership Just Ahead on a Road Sign with Blue Sky and Clouds in Background
October 19, 2020

As the traditional commercial insurance market continues to harden and more small-to-midsize companies are considering alternative risk transfer options, it can be valuable for brokers to understand how they might benefit from partnerships with captive managers.

"I think it's correct that an increasing number of smaller and midsize employers have become interested in potential captive solutions for various financial risks," said Mike Ferguson, CEO of the Self-Insurance Institute of America (SIIA). "So, it's important for brokers to help deliver these solutions where they make sense. But delivering these solutions effectively is largely dependent on partnering with the right captive manager."

Mr. Ferguson made the remarks while moderating a session titled "What Brokers Need To Know about Working with Captive Managers" during SIIA's Virtual 40th Annual National Conference & Expo.

Explaining the role of the captive manager, Park Eddy, president and CEO of Active Captive Management, said, "Generally, it is to assist the captive to perform its necessary insurance functions and operations and also to communicate with the regulators."

In doing so, the captive manager's four main functions involve underwriting, claims handling, record keeping, and compliance, Mr. Eddy said.

"As a broker, I think you really need to look at us as a team member," Mr. Eddy said, adding that the captive insurance company should fit hand-in-glove with the insurance program that the broker has designed.

That aspect can be particularly important in an environment like the current market in which a broker might have a difficult time fully addressing a client's insurance needs in the traditional market.

"At the end of the day, we're here to partner with the broker, specifically as it relates to gaps in coverages or when the broker is working on the insurance renewal, that we are alongside them so that we make sure that there's not duplicative coverage in the captive," said Sandra Fenters, president and CEO of Capterra Risk Solutions LLC.

"I think where this really hits home is that as we see us move into a hard market ... we're seeing intense underwriting renewals in the traditional market, we're seeing a reduction in the availability of limits and capacity, we're seeing even nonrenewals or cancellations," Ms. Fenters said. The captive can fill in gaps in coverage, provide coverage where it's not available, and fill in deductibles and sublimits, she said.

"Brokers can only influence markets and underwriters so much to get what they need for their customers from a total risk management standpoint," Ms. Fenters said. But a captive manager can partner with a broker to help provide the client a complete insurance solution.

In the course of their business, captive managers typically outsource a variety of services such as actuarial, tax, legal, and perhaps claims administration. Such an approach is best practice, Ms. Fenters said.

"Typically, a captive manager is viewed as the quarterback if you will, because there are multiple vendors involved," she said. "Our primary role is really our relationship with the regulators."

The reason that outsourcing those services can be considered best practice for captive managers is that while there might be advantages in a one-stop-shop approach, there are greater advantages to be gained in access to expertise, said Ken Kotch, principal and national practice leader at Ryan LLC.

"I think a captive manager who has not aligned him[self] or herself with some very specialized experts in various disciplines is doing themselves and their clients a disservice," Mr. Kotch said.

The captive manager should be heavily involved in the alternative risk transfer discussion with the clients and the actual creation of the captive, but items like the actuarial and underwriting component, filing of federal tax returns, and legal should typically be provided by outside experts brought aboard in "a synergistic team framework," he said.

Brokers should look at working with captive managers as an opportunity to deliver a value-added service to their clients in the form of captive insurance, the panelists suggested.

"If you can bring this value-added service in the form of a captive, you're much more likely to retain the client," said Ms. Fenters.

The other benefit for a broker is the possibility of peer-to-peer referrals from clients who are happy with their captive insurance experience, she said.

It's important for brokers to understand that a captive insurance company has a limited capacity to take on risk, said Mr. Eddy. It can't be a replacement for the entire commercial insurance market, but it can be a tool to solve problems the broker can't solve in the commercial marketplace.

"This is going to allow you to be better and do your job better solving the risk most efficiently for your client," Mr. Eddy said.

By approaching the relationship between brokers and captive managers as an opportunity to produce synergies that are going to benefit the client and putting the client's needs and interests first, the broker can produce better outcomes for its clients, Mr. Kotch said.

"We're not trying to remove anyone from the equation here. We're trying to add some solutions to bring some greater certainty in this uncertain world from an indemnification perspective to the stakeholders of the enterprise," he said.

Ultimately, the panelists emphasized that brokers should view captive managers as potential partners in client service, not as someone looking to take their business.

"It's my hope that we'll really get the brokers over the hurdle that we're here to partner with them, we're not here to cannibalize their business," said Ms. Fenters.

"The captive insurance arrangement is a very, very useful tool, but it really needs to be customized for the enterprise that is going to avail itself of the benefits," said Mr. Kotch. "And nobody knows that enterprise better than the broker."

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