12 September 2021ArticleAnalysis

Member Insurance: 40 years of insuring hardware

Member Insurance started life in 1982 when it was created and domiciled on Bermuda by the American Hardware & Lumber Agency.Its focus was and remains to insure hardware stores throughout the US, including co-ops which have thousands of members all across the country, with some familiar names: True Value, Do It Best, Ace Hardware, and many others.Scott Reynolds, president and chief executive of Member Insurance, told Captive International that right at the start the parent company was focused on giving the members more to do and more control, so they took all that business, which was being placed in the agency, and formed a captive.According to Reynolds, the selection of Bermuda as the domicile was a good decision as the Island provides a broad and deep set of resources and excellent options for service providers.Reynolds joined 11 years ago and says the captive remains much the same as when it started, although it is now more open.“We used to be a closed group captive, where only members of certain co-ops could access our products,” he says. “Now as long as it’s a hardware store and has an independent buying decision for insurance and it qualifies and meets our underwriting guidelines, we will put it into our captive programme.“It’s a solid domicile being in Bermuda. I know that when I go to Hamilton multiple times a year, I’m in the insurance capital of the world.”According to Reynolds the parent put all the major commercial lines of business into the captive which is not based in Bermuda for any kind of tax advantage—it’s filed as a 953(d) with the US Internal Revenue Service in the US and pays taxes as if it were domiciled in a US jurisdiction.However, it’s the depth of the resources in Bermuda that keep the captive there. Reynolds regards Bermuda as being very efficient, not only in terms of the service providers the captive deals with but also because in his view the regulatory authorities in Bermuda produce sensible laws and regulations and are responsive to questions.“It’s excellent and sensible regulation,” Reynolds explains. “For instance, if I were based in the US and I had to file an annual statement according to the prescribed format by the National Association of Insurance Commissioners it would be an exceedingly thick book of repetitive and perhaps superfluous information that would cost me a great deal of money and resources to assemble.“In Bermuda I file a statement with the Bermuda Monetary Authority that addresses all the things that a regulator should be looking at: testing our solvency, our presence in Bermuda, the accuracy of our financial statements, our adherence to laws and regulations in Bermuda and that it’s consistent with other parts of the world. It’s simpler: I can do it with my service providers in Bermuda for a great deal less money, so it makes a lot of sense.”Member Insurance has a captive manager in Bermuda: SRS. It provides the accounting oversight of the captive and all the services in terms of sessions between the fronting carriers and the captive on the Island.The agency can place business in the captive, with an insurance company in the US or even in London outside the captive. Member Insurance has about 1,000 insureds and roughly half of them are participating in its captive programme.

“The captive’s stance on risk-taking has changed over the years as it has expanded.” Scott Reynolds, Member Insurance

Past claims
Looking at past claims over the 40 years the captive has been running, it has had some very large losses to property. One loss that made the headlines was in 2012 in Washington DC where a building owned by Frager’s Hardware caught fire and the TV news filmed a video which made it look as if the plume of smoke from the building was coming from the Capitol Building. As a result, stock market trading was halted until the news was clarified and people realised that the Capitol was not on fire.Reviewing the growth of the company, Reynolds says that in the beginning the captive was strictly true value hardware. It has expanded over the years and he views each expansion as a significant milestone for the company.The inclusion of more co-ops has allowed the captive to get to the point today—which it decided on a couple of years ago—where it allows any hardware store owner to participate in the captive programme, regardless of the co-op affiliation.According to Reynolds, the captive’s stance on risk-taking has changed over the years as it has expanded in terms of membership.“At one time, it put life and health products into our captive. However, it wasn’t profitable, so management decided to remove those products—they may entertain that again in the future, but it’s been that way for the past 15 years.“When I started here in 2011, I told the board of directors that I had two overriding principles: to protect the capital of the members and to provide a high level of service, and that’s what we continue to strive to do,” he says.“I would recommend anyone who is considering the formation of captive to look very seriously at Bermuda and the resources it can provide. I’m happy to be part of the Bermuda Captive Owners Association—I’m currently its president.“The association is being wound down and integrated with the new Bermuda Captive Network, so I would encourage captive owners all over the world to become members of the new network even if they’re not domiciled in Bermuda.”