Risky Business Captive Insurer Bypasses Front In New U.S. Domicile

Washington, D.C.

An agent, initially frustrated by a shortage of coverage for his clients in the entertainment industry, and later by the lack of fronting capacity needed to set up a captive insurer, solved both problems by setting up shop in one of the newest U.S. captive domiciles.

At the Captive Insurance Council of the District of Columbia Inc. Second Annual Conference here, Jeffrey Cohen, president of Insurance Designers in Owings Mills, Md., told National Underwriter that he was able to strike a deal with a D.C. regulator to bypass the fronting requirement.

Since finding a fronting carrier has become more and more difficult for captives”scarcer-than-hens teeth,” by Mr. Cohens descriptionhe devised a way to form a captive without a front and approached William P. White, director, captive insurance for the Department of Insurance & Securities Regulation in Washington, D.C.

As an agent trying to find coverage for his clients–entertainers, clubs and concert venues–”I was stopped in my tracks,” said Mr. Cohen, listing the Rolling Stones, P. Diddy and Eminem among recognize entertainers on his client roster.

Mr. Cohen said he insures special events, entertainers and concerts with casualty coverage, including spectator liability and crisis liability.

After Sept. 11, 2001, he contends that the big carriers who specialized in this pulled out. “They couldnt find the expertise, the staff with proficiencies to do it,” or the programs they were involved with were led by managing general agents who werent on the same page as carriers with respect to underwriting profits, he said.

Mr. Cohen decided to form the captive after approaching 47 carriers to try to get a program going. These carriers were running average loss ratios of 138, while the loss ratio for his book is less than 4, he said, explaining why he decided to go forward without their support.

Mr. Cohen set up the agency captive in Washington, D.C. in the spring and now is able to write the coverage for his clients. “Now I have complete control, instead of dealing with underwriters who are too scared of nightclubs because they go to bed at 8 oclock.”

Underwriters, he said, dont always understand “the matrix behind how the business is done and how to split up the exposure.” How he splits it up, however, is “the secret.”

He and his staff, he said, carefully study and dissect the exposures, including liquor liability, slip-and-fall exposures, and those related to allegations of assault and battery.

Mr. White said some captives are writing directly, but the frontless captive is not a one-size-fits-all solution. “Obviously we look very carefully and its not every captive that can do that,” he said.

He added that Mr. Cohen operates on a limited basis and “under specific circumstances,” such as insuring only events in Washington, D.C.

The relaxation of the fronting requirement has been allowed “in recognition of the fact that there are some tremendous problems right now in terms of finding fronting companies,” he said.

Mr. White said there are better ways to approach the fronting problem than “just standing pat on the idea that you absolutely have to find a fronting company. After all, our concern is solvency.”

The department, he said, is addressing the issue “from the standpoint of capital and surplus, and limitations on what youre writing and who youre writing for.”

Also important is the individual involvedand a level of expertise, as well as organizational structure.

Michael Mead, president of M.R. Mead & Co., a captive management company located in Chicago, and a member of the board of the Captive Insurance Companies Association, said bypassing a front “is allowed, depending on the situations.”

He added that Mr. Cohen deals only with “very carefully controlled situations,” and that D.C. Insurance Commissioner Lawrence Mirel and Mr. White know exactly what the individuals involved are doing.

Mr. White cautioned that he “wouldnt want anybody to think that we have captives that are set up to willy-nilly go out to issue paper. Thats not the case at all.”

He said the department looks for well-established organizations that are “able to support what theyre writing with good capital and surplus,” and those that have demonstrated their expertise to the departments satisfaction.

And how many organizations can afford to write direct?

“Thats part of the question,” he said. “Thats what were going to have to look at closely, very closely.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.