Microcaptives and transportation: teaching an old dog new tricks
The use of captives in transportation is nothing new. However, to date the use of single parent captives in financing auto risk has been reserved for true large market risks, whereas group captives have dominated the middle market in the context of alternative risk transfer solutions.
Segregated cell solutions can, and do, occasionally work for larger middle market solutions, but these aren’t particularly common due to the collateral costs required to secure guaranteed excess liability cost over them. Microcaptives haven’t held any market share in auto liability despite ever-hardening rates in the standard insurance market.
In this essay we’ll delve into the current dynamics of the auto market, the role alternative risk transfer solutions fit into currently, and the emerging option of microcaptive solutions. Standard insurance markets have seen years of steadily rising auto liability rates that show no signs of stopping. The excess auto liability market has followed suit. The businesses which feel these impacts most severely are those that depend on large fleets of heavy, or extra heavy, vehicles for their revenue.
There is a myriad of contributing causes to shake a finger at, but to the producer sitting across from a disgruntled insured none of those reasons will be front of mind. Producers serve numerous and varying purposes to their insureds, but no business owner would provide excuses outside of the scope of reasonably expected influence among them.
Any producer who has been through several large fleet renewals—especially those with heavy—will have been pressed in conversations such as: “I had no/few losses, yet my rates increase at renewal. Is there anything that can be done?” Many producers offer alternative risk transfer solutions to risks whose owners want to take control of their insurance programmes and lower the total cost of risk.
In the context of the middle market group, captives are the in-vogue solution for casualty-driven businesses. It’s not uncommon to hear a business owner brag about its participation in a group captive. Group captives are so competitive in the middle market that gatekeepers will often state “we are in a captive” as soon as they receive an inbound call from a producer as an insurmountable objection to any sales pitch (actual group captive participation isn’t required for this tactic).
Group captives offer insureds the opportunity to lay off coverage through risk-pooling with other thoroughly underwritten risks that meet the group’s stringent loss ratio requirements. These barriers to entry exist so that the members can reap benefits through the group’s overall performance. The scale offered by large group captives allows minimums to be met for fronting or reinsurance securing the members an AM Best ‘A’ rating.
For many insureds, group captives represent the light at the end of a long frustrating tunnel—that is, for those businesses that fit and agree to their terms. If you’re the owner of a long-haul trucking company that boasts a point 0.82 experience modifier and you’re receiving 60 percent dividends annually from a participating workers’ compensation carrier (LWCC, Texas Mutual, etc) and you’d like to join a group captive to control your auto insurance costs, you will have to do so at the cost of your steady dividends.
Group captives rarely offer 50 percent in annual distributions. The necessity of requiring general liability and workers’ compensation participation as preferred lines of business is born from the need for the capital required to fund losses that pierce the groups shared lost fund.
These assessments (a shared fund that serves to pay out losses over the group’s designated frequency threshold by spreading the cost to all the group’s members), can often reduce, or eliminate, the distribution of underwriting profits to group captive owners. Underwriting profits from general liability and workers’ compensation are necessary to guarantee the success of group captives by watering down auto losses.
In fact, there are certain classes of business that most group captives aren’t willing to entertain out of concern for general liability exposure combined with heavy auto exposure. Concrete pumping is an illustrative example. Due to their general liability exposure these risks aren’t allowed in a well-known homogenous group captive that was purposely built for concrete risks including ready mix concrete. Loaded ready-mix concrete and concrete pump trucks are some of the heaviest vehicles on the road and have very similar risk profiles in the context of auto liability. The general liability risk posed by the pump trucks because the service they provide is the pumping primarily as opposed to the delivery of ready-mix concrete.
While there’s nothing wrong with a group captive protecting the interests of its members there are gaps in the market that are served only by standard insurance carriers who can’t avoid sharply rising premiums. Clearly financing auto liability risks is the most significant frequent pain point for business owners who don’t fall in within the risk appetite of group captives.
The second most visceral pain point for business owners is excess liability. To date, there aren’t group captives that have excess liability participation. Single parent captives can provide profitable alternative risk-financing options to business owners used to transfer risk have historically been a solution limited to large market risks with the ability to cover not only loss funds, fees, and collateral.
While these solutions have the potential to significantly reduce the insured’s total cost over risk through the underwriting profits there’s a significant portion of the middle market who would like to take control of their insurance programme by owning and self-financing their own risks.
There are programmes aiming to fill these gaps in the market by providing microcaptive and blended solutions involving captive-funded reinsurance layer for both primary auto liability and excess liability. Purchasing excess liability over a captive usually requires significant collateral in the form of a line of credit, cash, or surety bonds.
This is unique in the middle market as these options can be offered with no additional required collateral. These programmes appeal to classes of businesses that suffer from premium rates and want to bet on themselves by financing their own risks, such as concrete pumpers who want a better primary auto liability solution or a business owner of any class who has a desire to realise underwriting profits through the ownership of a captive.
Excess liability offerings are especially impactful for risks which already have successful alternative risk transfer solutions (including group captive solutions) in place in the primary layers as the loss ratio is often low enough to suggest the reduced likelihood of a loss of significant severity to pierce their excess liability layers.
Jeremy Colombik is president of Management Services International. He can be contacted at: firstname.lastname@example.org
Henry Laville is risk transfer specialist at Elite Risk Services. He can be contacted at: email@example.com