Does your captive management team understand your unique risk management needs?
Business and industry in general have found themselves in uncharted territory. The landscape of how to sell, what to sell, who to sell to, and more importantly what is selling, has dramatically changed in recent years.
Along the way, traditional successful companies with high revenue and, in turn, high premiums have embraced the opportunity to take a high deductible here and there. Maybe if the business has been really fortunate to build a successful risk management strategy, the business would find a captive to align with and grab some control over their risk.
However, in reality, these companies have been the exception rather than the rule. Also, with the past few years of fast business growth, broader strategies to marketing and faster distribution to the end user costs of fuel, rent, building ownership, and transportation in general have skyrocketed.
None of this is truly controllable, but at the same time the traditional insurance marketplace is all but collapsing. While there are several risk managers, brokers and insurers who at every turn look at this as an “unprecedented” moment, the reality is that alternative insurance markets have existed for over 100 years specifically for moments like this.
This time, the end user—the client—has the opportunity to participate in that risk control and transfer that risk while actually taking some semblance of control, rather than just continuing to buy an insurance policy that may or may not cover the company when it needs it most.
Worse yet, without taking control of the business it is thrown into what those of us in insurance know as “class” underwriting. This means that if the business is in trucking the business starts with specific pricing, or if the business is running a charter boat company, the company starts with specific base pricing.
While there is definitely merit to class underwriting, the dollars we pay as business owners and consumers are too important for us not to want to figure out how to take control.
That’s where captive insurance companies and programmes can truly create a solution that until now the average business owner never knew existed or truly couldn’t get a clear understanding on how it could benefit them.
From the retail insurance broker’s point of view, the goal is simple: to bring the client a solution that’s cost-effective and provides them with the protection they need. At the same time traditional insurers will frown upon that same retail broker bringing in a high deductible, or lower amount of coverage, and then have a captive insurance programme round out that account.
So, at certain levels and in specific instances, the need is for the traditional insurer to be brought in with a clear understanding of the client’s short and long-term goals.
If the business has the right captive manager, along with an insurance broker who is truly willing to put the client first, before the agency’s list of preferred insurers and before the amount of commission the agents are to be paid (yes, there will be people offended at this discussion, but like a captive manager the business owner knows that numbers don’t lie) everyone can win.
A new solution
The reason is simple: there are now ways to create a very broad, yet defined symbiotic, relationship with the right insurers, which have been specifically built to give the client the flexibility to take on as much or as little of a risk as they would like and are financially able to absorb.
Therefore, creating the right insurance programme has never been easier, or made sense, unless you’ve been in business 30 years or more and know this is a new version of that time in securing insurance.
For instance, it’s most likely that business insurance premiums have doubled or tripled in the past few years, yet the business losses have not, so it’s frustrating for sure. The first response seems to be: “We want to self-insure it all” yet that’s probably not in the best interest of that client. If the business is in distribution and has a trucking company that has seen less than industry “class”-based underwriting losses, a captive insurance solution totally makes sense.
However, no matter how great the risk management team and programme are, an accident is always going to be an accident. Issues are going to continue to happen, so managing the business’s expectations about how much risk to take is the first step.
Yes, it’s hard to see what hasn’t happened yet. Everyone has a hard time looking beyond our footprint, but starting off slowly with the right solution will pay off tenfold in the long term, so much so that by the time the soft insurance market comes back around, the captive insurance solution and thought process will most likely become permanent at some level.
Unlike other soft insurance markets in prior years, the data we now have about losses and expected exposures is and will continue to be different, again as stated earlier—because industry and business as a whole are in complete disarray and flux.
With parametric-triggered insurance solutions (designed to limit expense, but which also very narrowly and clearly define the risk to cover) businesses whose losses revolve around weather-related exposures can start to grab control of those exposures. This works as long as expectations as to how much or how little insurance can be afforded are managed.
Captives are and will ultimately become the first line of defence in the “catastrophic” peril space, but captive insurance has to be managed on a case-by-case basis. This will not be a global fix, nor will it happen overnight.
Jeremy Colombik is managing partner at Management Services International. He can be contacted at: firstname.lastname@example.org
Jeff Kleid is the founder of Elite Risk Services. He can be contacted at: email@example.com