Though often poorly understood in the broader insurance marketplace, captive insurance companies and program business, can present compelling opportunities for business expansion and transforma­tion – particularly in complex, arcane or otherwise underserved markets that require special expertise for underwriting and coverage. During a recent PropertyCasualty360 web seminar on the topic, three Zurich programs and captives specialists sought to demystify these two specialized approaches to insurance by addressing key questions including:

  • What constitutes a program or captive and what advantages can they offer beyond traditional coverage?
  • How do you go about moving a book of business into a program?
  • What makes for a good captive candidate and how can they fit clients of various sizes?
  • How can you leverage the various options available for single-parent captives?

Defining Programs and Captives

Programs and captives share a number of common features, but are structured differently and serve distinct purposes.

The simplest definition of a program is when “an insurance carrier grants underwriting authority to a program administrator,” explained the first presenter, Brian Kenny, who serves as regional vice president of sales for Zurich Programs. The program administrator and the carrier collaborate to write a book of business, leveraging the program administrator’s specialized expertise in a particular field, class of business, or line of business. The carrier assumes a co-managing role, providing referral underwriting and auditing services, for example. Kenny cited a number of repre­sentative examples of specialized, underserved market niches that can be served well via programs. These include excess and surplus property insurance, workers’ compensation for temporary staff, contract litiga­tion insurance, and professional liability insurance for veterinarians.

In general, he added, programs typically serve a homogenous class of business in contrast to the diverse base of insureds served by typical insurance companies. Overall size of the program market is estimated to be $30 billion to $40 billion.

A captive insurance company, in contrast to a program, is its own corporate entity. Typically created and controlled by a parent company, professional association, a group of businesses or a management company, the captive’s sole purpose is to provide insurance for the parent, association, corporate group, or some similarly limited clientele.

Typically, captives are a vehicle to provide the parent company (or companies) greater control over the insurance offering and its costs – and also a chance to share the profits from underwriting. Workers’ compensation, auto liability and physical damage, general liability, property, and employee benefits are all commonplace coverage offerings for captives.

“Captives have been around since the 1920s,” noted presenter Pam Bryan, a 10-year veteran of the captive market who serves as Zurich’s vice president for captives. She added that in recent decades the number of captives has grown significantly to total in excess of 5,600 captive insurance companies worldwide.

Bermuda and Cayman are indeed the leading domiciles based on the number of captives – but you might be surprised to learn that the state of Vermont is the largest on-shore captive jurisdiction. Approximately 32 states now permit captives to domicile within their jurisdictions, and though “the regulatory environ­ment varies from state-to-state, as a general rule, most of these states are quite friendly to captives,” Bryan added.

Moving a Book of Business to a Program

The relationship between insurance carrier and program administrator brings a number of benefits, Kenny noted. No insurance carrier possesses underwriting expertise in every field, nor does the carrier have the staffing to write new programs continuously. The program administrator covers both of those deficits while bringing together knowledge from a vast distribution base – and offering inno­vative approaches and technologies that accelerate time-to-market.

 “In most cases, program administra­tors have full capabilities for rating, quoting, binding, issuing, and servicing their policies,” Kenny said, adding that they also may offer loss control services, premium audit departments, claims administration capabilities, and even actuarial analysis and filing support.

Insurance carriers, naturally, have a selective appetite for programs. Broadly speaking, Kenny said, Zurich seeks single or multi-line programs of at least $5 million in annual premium, in underserved or misunderstood markets, but with consistent coverage and limits requirements. Zurich wants to be able to delegate underwriting authority to a program administrator with proven expertise in serving a homogeneous group or common industry and the ability to rate, quote, issue, and service its policies.

Moreover, “if you want to move a large book of business to a program, you need a history of data that demonstrates profitability, an established distribution network, and a solid plan to grow the business,” Kenny added.

Finding a Good Fit for the Captive Model

Steve Bauman, head of captives for Zurich Global Corporate in North America, alternated with Pam Bryan in providing an overview of the various types of captive structures – and identifying what characterizes a good captive candidate. Generally speaking, they said, a solid captive candidate would serve an insured (or group of insureds) that have a long-term commitment to the captive structure, a reasonably predictable book of business, solid risk management practices, and a financially sound balance sheet. And, they emphasized, captives are no longer just for the largest corporations, but today often serve organizations of various sizes.

Bryan and Bauman offered a quick overview of various types of captives, including:

  • The single-parent captive, which insures its corporate parent and its subsidiaries and acts as the Risk Management infrastructure for the corporation;
  • The member-owned group captive, in which unaffiliated companies join together to form a reinsurance company that typically focuses on traditional casualty lines – workers comp, general liability, and auto – and sometimes other lines such as property, and in which the insured shares as risk taker;
  • The sponsored captive (also known as SPC, segregated cell, protected cell, separate account or Series LLC), in which the core company is owned by one entity, while cell companies (each with their own risk, legal segregation, and protection of assets) are rented to others;
  • Agency and association captives, which are organized by an agency, broker, program admin­istrator, or association that shares in the underwriting risk of their customers (or members) placed in the captive.

Bryan emphasized that captive insurance companies can serve either homogenous or heterogeneous markets – with advantages and disadvantages in each circumstance. Homogenous captives can be more limited in growth potential, since they serve one industry or group, but they are easier for the reinsurer to price appropriately. On the other hand, heterogeneous captives often have the potential to grow more rapidly – but pose greater pricing challenges for the insurer.

Programs and captives are worth a closer look for a variety of compel­ling reasons, according to the presenters. Programs, in particular, open up opportunities for profitable growth in underserved or misunder­stood market niches, Kenny said. And well-managed captives, Bryan said, have the potential to normalize insurance industry market cycles for the parent (or the captive insureds) while tailoring products and services to meet the very specific needs of insureds.

John W. DeWitt, an event moderator and contributing editor for National Underwriter Property & Casualty, PropertyCasualty360, and other insurance industry publications, is principal and senior consultant for JW DeWitt Business Communications in New Salem, Mass.

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