Celebrating 20 years of growth

Spring Consulting Group shares the same founding date as Captive International. Key company executives give their perspectives on two decades of growth.

"We continue to see different lines and additional uses for captives arise." Karin Landry

"A captive provides employers an opportunity to recapture premiums from the commercial market." Prabal Lakhanpal

"Companies are looking for areas of control, cost savings, risk mitigation, and possibly profitability." TJ Scherer

"Mixing benefits and various other lines of coverage within the captive can help smooth the volatility." Peter Johnson

What are the major changes you have seen in the captive insurance sector since Spring Consulting Group’s launch?

Karin Landry: We are celebrating Spring’s 20th birthday in March! Since Spring was founded in 2004 with a focus on captive insurance, I have seen the industry evolve exponentially. The biggest changes during the past two decades have been an emergence of employee benefits captives, including a rise in medical stop-loss captives, the integration of property and casualty (P&C) and benefits captives, and changes at the US Department of Labor, and now we are seeing a significant interest using a captive to terminate pension plans.

During that time, emerging risks have come and gone, with organisations now focusing on areas such as cyber insurance and climate change which were not a concern 20 years ago. Captives have played a role in navigating through the COVID-19 pandemic and ensuring their insurance programmes adapted. We continue to see different lines and additional uses for captives arise, and I don’t see that stopping any time soon.

We have seen an influx in technology within the sector, and solutions such as parametrics working with captives are taking the spotlight more recently.

Are there elements of the captive sector and in alternative risk transfer that have remained constant?

Prabal Lakhanpal: Captives have been a steady force for many organisations as the economy, insurance markets, and workforce change rapidly. Regardless of external shifts, captives have consistently offered:

• Reduced total cost of insurance: Insurance carriers develop premiums by heavily weighing on industry averages, state rates, and to some degree on an employer’s individual loss experience. This may lead to pricing that may not accurately reflect an organisation’s actual loss experience.

A captive provides employers an opportunity to recapture premiums from the commercial market and build a sustainable long-term model for their insurance needs.

• Insulation from market fluctuations: As a member in a captive programme, employers are less susceptible to unpredictable rising costs imposed by conventional insurers every renewal season, as a balanced funding approach can smooth the cyclical volatility of the commercial insurance markets.

• Protection from cash flow volatility: Leveraging a captive to fund medical stop-loss can lower the cash flow volatility often faced by self-insured programmes on a monthly basis. Having a captive cover claims at a substantially lower stop-loss level allows employers to smooth out plan funding and mitigate cashflow risk to the company.

Looking at captives today, how do you assess the state of the sector?

Lakhanpal: A few key points stand out. First, the market is evolving; how captives are being used and their growing acceptance from the commercial market is shifting constantly.

We’re seeing an increase in clarity and discussion around the definitions of risk distribution and risk shifting due to recent litigation. This has helped us guide conversations and captive formations for clients and be able to provide more knowledge and guidance than in previous years.

We’re seeing an uptick in enterprise engagement of captives. For a long time, captives were a tool used by risk managers purely to control insurance costs. Today, captives are becoming a much more central piece to operations and organisational risk management, with companies increasingly understanding that captives can be leveraged for a variety of other initiatives beyond those considered tradition.

For example, insuring benefits lines such as medical stop-loss through captives is more front and centre than in years past, and third-party risk is more of a focus.

What are some of the future opportunities you see?

TJ Scherer: In addition to what has already been mentioned, companies are looking for areas of control, cost savings, risk mitigation, and possibly profitability. For example, smaller businesses or those in certain geographical areas simply cannot get or afford some lines of insurance, taking them out of compliance.

Larger companies relying on these suppliers may offer a
waiver programme to hedge against possible losses they are brought into. With group captives becoming very mature in the space, insureds that have been in and grown with those programmes for years have shown a lot of interest in creating their own facility.

Knowing the commercial market leverage a captive provides, but having the scale and ability to write additional coverages into their own captive, is appealing.

What are some of the challenges?

Peter Johnson: There are many challenges. There is so much unknown and the market, in certain business sectors and geographical regions, has hardened extremely fast. Property insurance for instance has seen significant premium increases, particularly with carriers inflating property values in their pricing models.

Will the hardening continue? Will it soften soon and defeat the captive purpose? Have I missed the opportunity to form? With the need to take on substantial risk for premium credits in the property space, that cascades into more risk assumed and capital contribution to launch the captive.

There is less room for error. Mixing benefits and various other lines of coverage within the captive can help smooth the volatility and spread overhead costs among various lines.

What is the most important lesson the company has learned in the last two decades?

Landry: I have learned so much over Spring’s lifetime. One key lesson is that clients don’t know what they don’t know. Educating clients is a core pillar at Spring; ensuring they understand the different options and scenarios that could play out, and why certain solutions might make more sense than others.

We make it a point to show a broad range of options before lasering in on any specific path. We often find that this educational approach leads to more opportunities to work together, as dialogue like this can open doors to other lines of business or initiatives.

Another lesson learned is that with all things being equal, captive insurance is generally more cost-effective than commercial insurance. An organisation’s rates are adjusted for its experience and with lower frictional costs, captives are a better solution in the end.

Would you encourage a new player to enter the captive insurance sector?

Lakhanpal: Definitely! Captives will continue to be a strategic and valuable risk management tool for organisations, and there is so much room for creativity and career mobility within this career. I have found that having such a specialty area of expertise can be extremely valuable.

Young talent with fresh perspectives and varied backgrounds will be well-positioned to lead the industry into its next era. Organisations such as the CICA and others that are well known in the captives space are making the next generation of talent a top priority, which means those interested in the field will be welcomed with open arms and plenty of opportunities.

Karin Landry is managing partner at Spring Consulting Group. She can be contacted at: karin.landry@springgroup.com

Prabal Lakhanpal is senior vice president at Spring Consulting Group. He can be contacted at: prabal.lakhanpal@springgroup.com

TJ Scherer is vice president at Spring Consulting Group. He can be contacted at: tj.scherer@springconsulting.com

Peter Johnson is chief P&C actuary at Spring Consulting Group. He can be contacted at: peter.johnson@springgroup.com