Paddlesports Industry Tries Captive Route

"Our industry is affected by the [insurance] market cycle," noted Matt Menashes, executive director of the Professional Paddlesports Association in Springfield, Va., which represents the paddle sport industry (canoes, rafting and kayaks). "The period of the 1980s was the worse, when a huge portion of our members went bare or had to scramble for coverage that would meet their needs."

Because of rising costs and the tightness of the market, association executives said they are always looking at insurance options for their members. Mr. Brown said American Outdoors is constantly working to attract standard insurance market participants. The association also has implemented accreditation programs for its members to ensure professionals are operating the recreational programs.

"Overall, it has been profitable for [insurance] companies that understand the risk and participate," observed Mr. Brown. "But we are always looking for new participants and are willing to work with underwriters in the standard market to enhance their level of coverage [by undertaking] risk management strategies to make it a profitable program."

Currently, the programs are written in the surplus lines arena.

For PPA, one solution was a captive program called the Recreation Insurance Associationa rent-a-captive domiciled in Bermuda, managed by CBIZ Insurance Services, based in Cumberland, Md. The standard for membership was that about 65 percent of a participants receipts had to be in paddle sports, noted Mr. Menashes. The rest could be in any other related activity.

At its height, he said, the program had somewhere between 1,200 and 1,300 policies written for general liability and auto risks covering roughly 700 individual clients. Total premium writing in 2003 was close to $6 million, he reported.

Unfortunately, its success was also its downfall, because in 2003, a pullback by some primary carriers prompted more buyers to look at alternative markets and fueled faster growth at the captive than the facility could handle, Mr. Menashes reported. He said there appeared to be no reason for the pullback other than business decisions to reduce exposures.

"The appetite for outdoor recreation coverage is still pretty slim, though some folks are getting back in," he noted.

He said what really failed the captive was a cycle of investment and inadequate investment. The program is now in runoff, with the aim of covering claims and returning money to investors.

Quick growth produced inadequate capitalization, at least enough to sustain continued growth of the increased risks. Because the captive lacked the capital, it could not get reinsurance, and because the program could not obtain reinsurance, the investors were unwilling to put more capital into the program.

However, there were lessons learned from the experience, and at some point, when they will try the program again, Mr. Menashes said those lessons will be put to work, underlined by a conservative growth strategy. "The biggest lesson is that we now know what it takes to sustain a captive in the long term," he observed. "Most who start do not know that."

Risk management is an important area for professional paddlers, Mr. Menashes notedsomething that he wondered whether insurers appreciate as much as they should when underwriting a risk. He said it is a "misconception" that the risk is based upon the class of the rapids. In fact, the risk is all about the same, he saidadding that "weird things happen" on the rivers.

A better gauge would be to look at the volume of business and not just the loss history. Underwriters should also review the American Canoe Associations "critical judgment reports" and review the factors in paddle sport accidents.

He asserted there is a tremendous difference in the fatality figures between those who use commercial paddlers and individuals who strike out on their own. The total rate of fatalities in a year may number between 80 and 90, but eight-to-10 of those fatalities are with a commercial paddler.

"The underwriters at companies need to spend more time with the business," he said. "There is more complexity there than just looking at an insurance application."

One step that helps the underwriting of these risks is obtaining a waiver, which the participating paddler signs before going onto the water.

Charles "Reb" Gregg, an attorney in Houston who specializes in outdoor recreation law, helped the PPA produce a new waiver that reinforces and expands the languageimproving the indemnity provisions and protecting the outfitters from negligence. "It is astounding to me how many people think the releases are not useful," he said. "They absolutely are."

Only a few states do not allow them, but by and far they protect outfitters from simple negligence and the goofiness of participants. He said the release does not protect the outfitter from claims of recklessness or gross negligence. The test, he said, is simply: "Would another professional have done this?"

It also serves as a warning to the paddlers, alerting them to some of the perils they could face while on the rivera wakeup call of sorts. It is also an item that insurers like because it is an effective defense against claims. "One thing insurers ponder is, What does your release look like?" he noted.

One impediment insurers are creating by their underwriting practices for the industry is to make it difficult to allow new outfitters to get established, according to Mr. Menashes. Since insurers are focused on loss history, new outfitters find it difficult to get coverage. He understands the need for an underwriting profit, but insurers need to look at more, he insisted.

"A lot of the folks who come into this industry are long-time paddlers, are American Canoe Association-certified instructors, or have been involved in some type of outdoor recreation in the past," he explained. "They may be new to paddle sport, but they know risk management. They know how to paddle. They know what the factors are that make a trip safe or unsafe. They have the critical judgment necessary [to run the business]. A knee-jerk reaction that says, if you dont have a loss history you are not going to get insurance, just doesnt work for us."

"We want to see our industry grow, and that requires new entrants into the business," he continued. "If underwriting standards are keeping those people from starting up, thats not good."

There are other areas, he noted, where the paddler industry could use help from insurers, including health care costs and auto coverage. Even the manufacturers of the equipment could use some relief from product liability price increases, he said.

Overall, at least, the association executives said that at the least they did not expect to see a return to the 1980s when the market collapsed. "I'm optimistic that we will have something one way or the other," said Mr. Brown. "It may have to be a captive or a risk purchasing group, but we'll work out something."

Reproduced from National Underwriter Edition, March 17, 2005. Copyright 2005 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.