10 December 2020ArticleAnalysis

Safety in numbers

“The underwriting profit of the company that would be retained by a traditional insurance company is instead returned to members.” Kevin Poole, Artex Risk Solutions

“As companies settle into a captive programme, there’s a tendency to explore a wider range of coverages.” Erin Brosnihan, Kensington Management Group

There were a total of 772 insurance licensees under the supervision of the Cayman Islands Monetary Authority (CIMA) as at 30 September, 2021. Group captives represented one of the two main categories—alongside pure captives—with 128 companies.Cayman has long been a home to the captives industry, and the group captive space is no exception.Kevin Poole, director–business development, Artex Risk Solutions (Cayman), says: “Cayman has earned a reputation as a friendly group captive domicile, this is partly because Cayman is home to some of the world’s largest group captives and is also seeing an increase in growth in this sector.“CIMA and the service providers understand the nuances of group captives, while a group captive can be licensed under the same regulatory regime as a single parent company, making the initial startup process economical,” he adds.According to Poole, the increases in premium and assets are partly due to the formation of new captives, but also “because of the increases in new members being experienced by many groups due to the ongoing hardening market and the focus and strength on risk management and loss control efforts by each group captive”.Erin Brosnihan, president of Kensington Management Group, adds that, amid the pandemic, she witnessed exceptional growth in group captives and doesn’t expect any slowdown.“Group captives are gaining traction with insurance buyers across the US as a viable option, regardless of industry. Captives are becoming more mainstream and less of an alternative,” she says.Safety first
Formation numbers are steadily ticking up, but group captives are not for everyone. The decision of whether or not to take part in a group captive is more nuanced than a split down industry lines, according to Brosnihan.She says: “The decision is less about industry and more about the company culture. Companies most suited to group captives are those where safety and continuous improvements to safety are engrained in the company culture.”However, if you look more broadly at heterogeneous groups, then trucking and construction have been the most popular, says Poole. He says this is driven by the fact that these industries can be “difficult to underwrite and good risks are often penalised because of these industries’ poor performers”.He adds: “Homogenous groups that include a wide variance of manufacturing companies are also popular, while medical stop-loss groups often include many different industries. We are, however, seeing other industry groups emerge such as renewable energy, delivery firms and even seafood industries.”Clearly, the group captive space is experiencing exceptional growth, but why are companies choosing to join group captives when there is an array of other options?“The overriding value proposition of a group captive is the ability to reduce the overall cost of insurance and risk. Premiums are based on the insureds’ own experience, as opposed to the wider insurance industry,” says Brosnihan.She adds: “This approach rewards companies with a focus on safety and risk management. Over time, as companies raise the bar and strive for continuous improvement, premiums will decrease even further.”Raising the bar can become competitive between group members, improving risk management and the group’s overall success. Poole adds: “Once a member joins a group they are often surprised at the increased focus on safety and loss control which is, of course, at the centre of a group’s success and one of the main benefits of joining a group. Often using scorecards and performance rewards, this aspect becomes competitive within the group as members are rewarded for effective risk management.”Poole cites three other main benefits. Agreeing with Brosnihan, he says that costs are minimised due to the “collective purchasing power of the group”, with the ability to unbundle services.For example, he says, the group isn’t bound to use a carrier’s third-party administrator.“As often best-in-class members look to join a group captive it means the programme is not class underwritten like the traditional market, but instead based on members’ losses and exposure. Therefore the premium charged may also reflect each member’s claims experience and risk profile,” he explains.Increased control is another benefit of the group captive structure. Members are offered the ability “to gain control of their insurance programme, plus they have control over the operating decisions of the group, whether that be by increasing the captive retention or making decisions about operating costs and dividend payments”, says Poole.He adds: “The company is controlled by its members with input from its service providers.”Finally, Poole highlights underwriting profit potential, noting that the “underwriting profit of the company that would be retained by a traditional insurance company is instead returned to members who can receive dividends based on their own performance within the group plus investment income”.Limited loss experience
Group captives are not without their challenges, however, particularly when it comes to underwriting for members in industries with a limited history.Some of the newer group captives involve industries that are relatively young, and this means a traditional three or five-year loss history isn’t available, says Poole, warning that this can “cause issues when it comes to underwriting as the traditional fronting carriers are often reluctant to get involved”.“This can be overcome if, for example, a larger organisation that the members are all part of can demonstrate control over its membership through such things as mandatory risk control, driver training and telematics. If any industry data is available this can also help,” he says.Brosnihan adds: “Companies with a focus on safety and loss control benefit from the premium pricing approach inherent in the group captive model. However, for industries with a limited loss experience, it can be difficult to predict losses and develop premiums from an actuarial standpoint.“In the early years, this may lead to more volatility in premium relative to loss performance. As the captive matures it becomes easier to model and therefore, this challenge can be overcome.”“If you turn back the clock to the history of group captives, some of the first clients in Cayman were formed by healthcare entities who saw group purchasing power particularly when it came to reinsurance purchased as major advantage”, says Poole.He adds: “However, as mergers and acquisitions activity has increased in the healthcare sector over the last few years some of these groups have broken up. So the growth in group captive numbers reflects a decline in healthcare groups which makes the growth even more impressive.”Nowadays, says Poole, group captives are often either heterogeneous or homogenous and either broker-controlled or allow open membership (such as the Artex groups).“The traditional group captives often reinsure an A-rated fronting carrier and write a combination of workers’ compensation, general liability and auto liability, and perhaps auto physical damage. The usual structure would also include the use of frequency and severity layers, with losses being shared at the frequency level,” he explains.More recently, Artex is seeing an increase in medical stop-loss groups, of which some of the members are already group captive members.Poole says: “These captives often take a corridor retention above individual member retentions. In addition, we have seen more interest in groups looking to write property risks again above a member’s primary retention with reinsurance arranged above the captive retention.”Alternative structures such as property are driven by market conditions, he adds, while medical stop-loss is a result of a “realisation there is the potential to capture underwriting profit for a coverage that many would traditionally have left to a company’s human resources departments”.Looking ahead
Turning to the future, Poole and Brosnihan are both confident the group captive industry will prosper.Generally, Brosnihan is in no doubt that the captive industry will thrive.“As companies settle into a captive programme, there’s a tendency to explore a wider range of coverages. A company may initially join a group captive seeking workers’ compensation coverage and end up pursuing property or medical stop-loss or taking on higher limits as the benefits of a captive become clear,” she says.And, while group captives have “traditionally been the home of so call mid-market clients who aren’t large enough to warrant the formation of their own single parent captive”, Poole believes group captives and their associated membership will continue to grow.“This growth will be driven by the hardening market, the emergence of new industries looking for solutions and the ongoing prospect of retaining underwriting profits,” he says, adding that some of the growth seen in Cayman involves groups using segregated portfolio companies and incorporated cell structures.Essentially, group captives are here to stay and indeed, flourish. They’re the first choice for companies with safety ingrained in their culture and the appeal of group captives is broadening.With Cayman’s reputation as a premier jurisdiction, surely it will stand the best chance to take advantage of this acceleration and retain its spot at the forefront of the captive insurance industry.