Cyclicality in the supply of insurance can be very frustrating for businesses that need steady, predictable coverage. A captive can offer a solution, but insureds need to know what to expect if the transition is to be a rewarding one, says Steven Gibson of Dealer Risk Services.
Insurance professionals and our customers are subject to the sometimes wild market swings of our industry. Premiums can vary dramatically downward, as carriers seek to create revenue streams, or upward as they attempt to shore up their leaking levees.
Coverages that were once touted as essential for protecting businesses tend to disappear when the market changes.
The bottom line is that the insurance industry is cyclical. In a business world that runs on expense predictability and stability, this can leave customers frustrated and screaming for a better way, a solution to the madness. Such customers should explore the captive insurance concept.
“One of the final and most important parts in the development of a successful captive is in the members’ commitment to the model.”
A question of timing
Captives provide stability, continuity and predictability, and a true escape from the market. The key to getting the most out of a captive is timing.
We know there are essential market factors that must be present in an industry to make the captive concept palatable. One of these is limited market access: the availability of insurance in the marketplace.
When the market tightens, and certain classes of business are no longer on the carrier target or desired list, the options for insureds begin to run thin. This is when the captive insurance alternative should be presented.
Understanding that there are viable alternatives is often not enough, however. Insureds may complain about insurance industry premium increases, but still choose to work through the existing marketplace. This was evident with the major disruption experienced in our healthcare industry by the creation of the Affordable Care Act (ACA).
The ACA increased the cost of health insurance for business dramatically, yet only a small percentage then sought viable alternatives. Most accepted the higher premiums as a cost of doing business. The message that captives offered a solution was evidently not clear.
In the world of alternative risk solutions we often say: “they either get it or they don’t!”, and there seems to be little in between. Simply having the mindset to accept the captive concept is not enough. For the captive experience to be successful, there must be a strong, and existing, commitment to risk management.
With limited market access, an acceptance of alternative risk solutions and a solid risk management programme all in place, the chosen industry is primed for an introduction to captives.
From here, the core group of founding members must be courted and assimilated. If the captive is industry-specific (homogeneous), this group should take a lead in promoting the growth of the company to their industry associates and competitors. Admission standards must be stringent.
These early stages are a critical time in the growth of the captive. In the early days, expenses are high, with captive managers, third party administrators, attorneys, actuaries and accountants all involved. At the same time, premiums are low.
This is a very insecure time for the group, as growth becomes imperative. The irony is that while increased premium volume is essential, it must be profitable growth.
Maintaining strict underwriting guidelines is necessary to grow the platform successfully.
The success or failure of the programme is likely to be established by the requirements that are set for entrance, and by the development of a solid marketing plan for the upward development of the captive during its first three years.
Projections for premium volume need to be in accordance with the industry guidelines to ensure that the marketability of the captive to the various service providers remains viable.
It is important to note that one of the final and most important parts in the development of a successful captive is in the members’ commitment to the model, and their understanding that claims happen.
There are years when the seas may be rough, claims severity may be high and risk shifting and sharing may occur. But if the group is properly vetted and the appropriate claims and loss control procedures are in place, a bad year should not deter their enthusiasm for the concept.
Members must be committed to five years or more to make their captive experience successful and profitable.
Startup captives are always challenging, as is any new business. Once a captive has been successfully launched, using an alternative marketplace to meet insurance needs is extraordinarily rewarding.
The message of control becomes clear and, if the group is firmly committed, the captive concept truly provides the most competitive and stable opportunity in the insurance industry.
Steven Gibson is Program Manager of Dealer Management Group. He can be contacted at email@example.com
Dealer Risk Services, Captive, Insurance, Reinsurance, Affordable Care Act, North America