Captives are commonly accepted to be cheaper than the commercial insurance market, to be the best way to stabilise premiums through hard and soft markets, and to be the best place to handle cannabis risks - but is this accurate?
This was discussed at great length at a CICA panel, ‘The Great Debate II’, where captive experts challenged conventional wisdom within the industry. Speakers included: Joel Chansky, partner, Milliman; Hugh Rosenbaum, retired principal, Willis Towers Watson; Peter Rosiere, risk manager, Sodexo; and Gary Osborne, vice president, Risk Partners.
Rosiere argued that captives do save money, not only in terms of the commercial premiums they are saving, but do a better job in spreading risk over a longer period of time. Furthermore, he argued that there are no internal requirements for dealing with multiple brokers or programmes.
Rosenbaum brought up what he calls the “non-loss costs of a captive”, which begins with fronting costs and premium taxes, tot the administration costs of expensive captive managers.
Furthemore, he said another aspect that often gets left out of this formula is the cost of reinsurance, which captives have to purchase directly rather than being factored into the price of commercial insurance.
“The cost of running a captive often mounts up to the 25 or 30 percent you’d save from commercial insurance,” he said.
In terms of captives being the best method of stabilising premiums, Chansky suggested that while this may be true, the captive is also retaining its losses as well. “There is nothing stable about that,” he said.
Rosenbaum said: “The message I get across to single parent captive is that we may not offer you the best deal in soft markets, and we won’t offer the hardest deal in hard markets. Over time, we, at the captive level, can offer you a better deal.
“There is a better way, but the insurers won’t give it to you.”
Osborne reminded the audience that insurance companies are in the business to make money.
“A captive is a very effective way of realising an insurance company is just a bank you are borrowing money from,” he said.
Rosiere added: “Insurance companies don’t make money from premiums, they make money from not paying claims.”
Finally, in terms of a captive insurance vehicle being the best way of handling cannabis risk, the panel was again split on this due to the conflict at a federal level.
Marijuana is listed as a Schedule 1 drug under the US federal Controlled Substances Act, which means it not legal for sale. Furthermore, any money that is generated from the sale of the substance may implicate federal anti-money laundering laws.
Osborne acknowledged there has been a good track record and willingness of captives writing new coverages when the commercial markets aren’t ready - and that he is aware of at least three cannabis captives currently operational.
“The captive market is probably willing to work with the cannabis market, but there are still problems out there,” he said.
Chansky also noted the absence of information around cannabis insurance may create pricing issues, which could cause problems when claims start to arise, and might be an example of where self insurance is a better option - simply setting aside funding for future losses.
Rosenbaum added: “The original idea was that if you have an exposure which is problematical at a federal level, you have a situation where you use your captive as a buffer where the insurance market is reluctant to handle it. The argument was - like some of the wilder forms of cyber or enterprise risk - was to use the captive for that. I think it’s a crazy idea. When the house of cards comes down on you, you’d have to pay for it anyway.”
CICA 2019, captives, Commercial Insurance, cannabis risk, Joel Chansky, Hugh Rosenbaum, Peter Rosiere, Gary Osborne, WTW, Risk Partners, Sodexo,