CREATIVITY THROUGH CAPTIVES
Senior Vice President
There is no question that we continue to face a “hard” insurance market. With increases in catastrophic weather events and plaintiff attorneys securing ever-larger “nuclear” jury verdicts, insurance carriers continue to respond with steep price increases, dramatically larger deductibles and lower coverage limits. However, not all the news is bad. Sophisticated insurance buyers are turning this instability into a competitive advantage by strategically utilizing captive insurance companies. At a high level, a captive is an insurance company that is owned and controlled by an organization to insure its own large risk exposures, such as auto, general liability, property and workers’ compensation. In essence, a large insurance buyer becomes an insurance carrier for its own risks. One reason captives are appealing is because they allow businesses to avoid the cyclical and transactional (and frustrating) nature of the insurance industry, where pricing is often determined by overall industry performance (“class underwriting”), instead of based upon the loss/claims performance of your individual business. In addition to better and more consistent pricing, captives can further drive down your company’s total cost of risk by enabling you to reap the rewards of your strong claims history. The better your loss/claims performance, the larger the “dividends” you receive back from the captive. There is potential for downside in a captive if you are unable to control your claims performance, however, making it imperative to have a strong safety and claims management culture. Although captives have been used for decades, many organizations have trouble understanding which captive options are available to them and how to evaluate those options. Part of the confusion stems from different types of consultants trying to steer companies into a specific captive product, which may or may not be the best solution for that particular organization. This can result in the classic “square peg in a round hole” misfit. Graham Company is different. We pride ourselves on being a truly independent consultant. With access to domiciles across the United States and the Caribbean, our goal is simple: To help you determine if a captive is right for your organization, and if so, to find the captive option that best meets your individual needs.
Large organizations that are paying around $1.5 million or more for annual insurance can have a customizable captive solution that is designed to meet their unique needs (cash flow, collateral, risk appetite and size of operations). These captive solutions should include the flexibility to adjust the program as operations change or grow, instead of being locked into a rigid structure that does not evolve along with your organization over time. While setting up the right captive structure is critical, it is equally important that a strong risk management program be put in place to maximize the financial benefits, especially when potential returns/dividends from the captive could be up to 65% of annual premium. At Graham, our proprietary P2RIME® process enables us to identify key areas where your risk management program can be enhanced, so that together we can drive down your claims costs. In our opinion, this proactive safety culture is an absolute “must have” before deciding to enter or form a captive; otherwise, the risks are just too great. Here are just two examples of how Graham has helped large organizations take their risk management programs to the next level:
For one of the largest construction contractors in the country, we worked together to transform safety from a matter of compliance to an integral part of their company culture, resulting in an 86% reduction in workers’ compensation claims frequency.
Reducing Workers' Compensation Claims
For a nationwide health care provider, we were able to reduce workers’ compensation claims frequency by 40%, resulting in $31 million in estimated savings by identifying and focusing on safety protocols and processes at underperforming facilities.
Companies that have a comprehensive risk management program coupled with a captive insurance program will achieve a lower cost of risk compared to their competitors in the standard insurance markets. In addition to impacting their bottom line, we have seen companies leverage their captive premium returns/dividends in several innovative ways to solve business challenges and incentivize employee behaviors. Here are just a few that come to mind:
Giving to Employees.
Companies have given a portion of their captive premium returns directly to employees. This helps with recruiting and retention, a significant challenge across any industry, while also encouraging safe behavior – the ultimate goal.
One organization used a portion of their captive premium return to build a cafeteria where workers could enjoy healthy meals and connect with other workers while not on the road. This was done to promote physical and mental health, but also had a positive impact on retaining company drivers.
On the safety front, organizations have used their premium returns to reinvest in the business with safety technology.
If a captive insurance program sounds like the solution for you – whether it’s something your organization wants to implement now, or if prioritizing safety and loss control will position you for success with this type of program at some point in the future – we’re happy to discuss different creative options available to you.