Left: Tyler Harden, TTN Fleet Solutions; right: Jason Stevenson, Oswald Companies
24 January 2020Analysis

Pulling power: the benefits of a tow companies’ group captive

TowCap Premier’s first two members were Jim’s Towing Service (JTS) and Ten-West Towing (TWT), based around five miles apart in Bakersfield, California. Competing on the same patch, the two companies were fierce rivals.

Tyler Harden, now vice president of service provider network at TTN Fleet Solutions and chairman of TowCap Premier, was the third generation of ownership at JTS. His father and grandfather were initially sceptical about cooperating with TWT.

“It starts off being about money, but there are intrinsic benefits to being in a group of top performers in your industry.” Jason Stevenson, Oswald Companies

However, the experience of launching the captive together transformed the relationship between the old rivals, and since forming the captive they have worked together in other areas. Harden’s move to TTN Fleet Solutions to manage a network owed much to his experiences launching the group captive, and the two companies back home merged their heavy duty business lines.

Harden says: “It has been a huge success story and is about so much more than insurance premiums now. It’s about the relationships formed between members.”

The idea for TowCap Premier had arisen, as is so often the case with new captive launches, from frustration at the insurance coverage that was available in the market. The insurance market tends to think in terms of silos.

Clients are divided according to the business they do, on the basis that companies doing similar kinds of business will face similar kinds of risks. Insurers want clients to fit into their pre-existing categories, and do not like clients with risk profiles that do not quite fit into their risk matrix, because it makes it hard for them to model their exposures.

For businesses that fit neatly into their categories, this works well. But for companies that do not fit comfortably into the insurance industry’s list of business types, it can make getting insurance difficult, or expensive, or both.

Towing is one such business. The insurance market had traditionally treated towing as a subset of the trucking or crane industries. The equipment looks similar, the drivers have commercial driver’s licences in both cases, and both are regulated by the Department of Transportation. Tow trucks looked like cranes on wheels, and were insured accordingly.

However, that did not reflect the unique set of risks towing companies face, and was unsatisfactory for both sides. For the insured it meant coverage that did not fit perfectly with the business they conducted. For the insurer it meant risk that was hard to model, and losses that were hard to predict. The end result was imperfect coverage that was too expensive.

As Harden says: “Insurance is probably the third largest cost a towing company faces after equipment and payroll, so it is important to have the right arrangements in place.”

Insurers could, in theory, take extra time to understand the business and create models that properly reflect the industry, but this takes time and effort, and the industry was not big enough to justify the effort. Even when towing companies did find cover, they faced the risk that their insurer would terminate the relationship unexpectedly.

Rewarding high performance

Harden says: “We were a leading company in our industry, a high performer in terms of our risk, and yet we were forced to pay huge premiums due to market-wide issues. We were fed up with paying for other people’s mistakes.”

The solution was to create a captive, but having had the idea, Harden was faced with the dizzying array of choices that will be familiar to other captive owners who have gone through the same process.

Harden says: “Towing companies tend to have tight cash-flows, which was a barrier to entry for a single parent captive. The upfront cost was too high, it represented too great a risk.”

The group captive option was more economical: some of the largest towing companies spend enough on insurance to justify forming their own captive, but pooling resources to create something they could share would save money.

Towing in the US is an extremely regional business. Most providers operate in territories with a radius of around 50 miles, meaning that—unlike JTS and TWT—companies do not often compete against each other directly. But they did all experience the same pain when it came to buying insurance. This made it easier for them to consider working together to form the captive.

Many more decisions remained to be made, by people with limited experience in the insurance market, making the challenge of creating a captive a daunting one. However, the idea was pitched to National Interstate, at which point the prospective captive owners were immediately convinced they had found their partner. From that point on National Interstate took care of everything.

Jason Stevenson, vice president and leader of captives and programmes at Oswald Companies, TowCap's endorsed marketing advisor and broker, says: “National Interstate had an existing template that just needed to be applied to our needs. The underwriting, the actuarial, the domicile, was all part of the package.

“That made it much easier for the members, who had no real expertise in the insurance industry and were spread out geographically, and across time zones.”

TowCap’s members “didn’t have the bandwidth” to make all the necessary decisions, explains Stevenson.

“We would probably be still planning it today if we hadn’t worked with National Interstate. National Interstate and its insurance subsidiaries—Vanliner Insurance Company, National Interstate Insurance Company of Hawaii and Triumphe Casualty—are all A+ rated, so that made working with them an even more obvious choice in this case.”

Harden says: “We looked at other, existing group captives. We didn’t want to be lumped into a trucking or crane group captive, we really wanted to own our own programme, and for it to focus on our specific industry, to provide coverage tailored for towing. National Interstate was the option that provided that.”

Controlling your own destiny

TowCap’s members rely on the ongoing operational management of the captive by National Interstate so that they can focus on their own businesses, but they have the option of being more involved in the day-to-day process if they want to.

“Towing is a 24/7 industry and we didn’t want the distraction of having to learn to manage an insurance company,” says Harden.

Stevenson adds: “The group captive concept gives the best-performing companies control of their own destinies. The towing companies wanted to control who was coming into the captive—they did not want it to grow for the sake of it and admit any towing company that applied.”

The top 10 percent of the towing industry is very different from the bottom 90 percent in terms of risk profile, he says, explaining the need for exclusivity.

“There were hundreds of submissions from companies wanting to join, but it made more sense to be extra selective. The loss ratio of the members is very impressive, which means they get a good deal on premiums.”

TowCap, which now has 27 members, provided its members with standard casualty coverage and there are no plans to expand the scope of the coverage written in the captive.

Harden highlights TowCap’s claims-handling process as an area of particular satisfaction.

“The claims process is completely different when it is your own money,” he says. “As an insured it makes you more careful. The difference between having a captive and being insured in the commercial market has been a pleasant surprise.”

When something bad happens, members know the process is in their own hands, giving them greater influence over the situation, Harden says.

“National Interstate is there to guide us but we can talk to the claims adjuster and have control,” he adds.

Stevenson says: “The story of TowCap is echoed by many businesses forming risk retention groups. It starts off being about money, but there are intrinsic benefits to being in a group of top performers in your industry.

“It offers certainty that your risk management arrangements are secure and will always be there when you need them, in terms of the premium and the consistency of coverage.”

It is not necessarily about obtaining cheaper insurance, notes Harden. “Captives can provide cheaper insurance, but they can also be more expensive. Either way, at least the price is based on the behaviour of the insured,” he says.

“If a company is considering launching a group captive, some trepidation is understandable,” says Stevenson.

“My advice would be to find the right consultant. That makes a big difference, as they can simplify and demystify the whole process. Going it alone would be virtually impossible.”