SELF-INSURANCE ADMINISTRATION/CAPTIVES IN A HARDENING MARKET
by Carol Hammes
Self-insurance programs, captives, and risk retention groups will grow dramatically as premiums increase. Unless independent agencies start looking at self-insurance administration as a viable business opportunity, they’ll be left by the wayside — in more ways than one. Get the details in this document by Carol Hammes.
Even during the soft market, alternative risk funding techniques grew in importance, replacing traditional insurance.
Self-insurance programs, captives, and risk retention groups now have more than a third of the Commercial market — and it’s expected that this percentage will grow dramatically as premiums increase. Senior executives have a much better understanding of the concept of risk management, and they’re now accepting such programs more readily and realizing how they can be applied to business exposures beyond those traditionally addressed by insurance. Unless an independent agency starts to look at self-insurance administration as a viable business opportunity, it could be left by the wayside — in more ways than one. When third-party administrators, national and regional brokers, banks, and other aggressive local agencies get their foot in the door, they’ll not only get fee income that your agency could’ve had, they’ll also gain access to the account and the ability to solicit more traditional lines of insurance.
An agency doesn’t have to be large to take advantage of the self-insurance opportunity. The feasibility study, creation and coordination of self-insurance programs, and the placement of catastrophe insurance are based on basic principles understood by any insurance professional, regardless of the size of their organization. Being part of a larger firm might provide the opportunity to handle the servicing in-house. However, servicing can also be outsourced to third-party claims payment or loss control specialists. In these situations, fees to the agency for help in budget preparation, auditing administrators, monitoring the various program elements, preparing reports on the plan, and negotiating stop-loss coverages are totally justified.
Some agents are also getting involved in the captive arena either by setting up their own captives or joining 'rent-a-captives' created by insurance companies or other entities. The formation of offshore captives seems to be the fastest-growing trend in the alternative marketplace and is expected to become more prevalent as the market hardens. One of the attractive aspects of this approach to agents is that they can earn an underwriting profit. But more important from a marketing point of view, they can set underwriting guidelines for a program or niche that will protect their clients from market swings in pricing and risk selection. Using captives also helps stabilize agency income by tying its clients to a program that will be hard for them to leave.
Most agent-run captives have been set up for Commercial risks, although there are some for Personal Lines, particularly in areas where hurricanes have made Homeowners insurance hard to place. Because it takes a minimum of $2 million in premium to make a captive feasible (and generally up to $5 million for real success), the smaller the prospective account, the harder it will be to reach this threshold. But the more agencies that participate, the lower the premium each will need to place through the facility, making captives a viable option for agencies of all sizes.
This article is reproduced from The Middleton Letter with permission from Carol A. Hammes, CPCU. Carol Hammes can be reached at The Middleton Letter, P.O. Box 459, Pine, CO 80470; (303) 838-7385; (303) 838-7387 Fax; e -mail: [email protected]; Web site: www.middletongroup.com.