When an insured finds themselves in a hard insurance market, the business is faced with increasing premiums and often larger retentions affecting the businesses Total Cost of Risk. Owners will turn to the insurance broker to market the insurance program looking for cheaper insurance in the form of reduced premiums or lower retentions.
It is easy to get caught in the cycle of constantly shopping for lower premiums to keep insurance costs as low as possible. Captive Managers are working to change the way some people buy insurance by focusing on lowering the businesses’ total cost of risk rather than hunting for lower premiums.
As an insured begins to evaluate the total cost of risk for their program, the insureds must evaluate several factors outside of the premium spend. When an insured chooses to take control of the insurance program, they should have options to take as little, or as much risk, as they are comfortable with within the budget.
Taking control of risk gives the insured the ability to custom manuscript policies allowing them to cover what is needed and not be charged for un-needed add-ons or sub-limits. When manuscripting policies, this gives the insured the opportunity to insert professional service providers. One contributing factor to an increased Total Cost of Risk calculation is the Allocated Loss Adjustment Expenses and the incurred loss payout. There may be times a business deems a claim to be baseless and they want to fight it, only for the insurer to settle the claim and approve a payout. Based on businesses retention this can impact your Total Cost of Risk by increasing the amount above premiums paid that the insured contributes to the settlement. If inserting your desired legal team and other Third-Party Administrators, business may have the ability to fight claims or achieve a reduced settlement.
Forming a captive insurance company can assist an insured in taking control of its risk management program by taking on a portion of the commercial program either through a deductible reimbursement policy, quota share arrangement, or a reinsurance agreement.
Getting five years of premium history and five years of loss runs can be beneficial in helping the captive manager do a loss stratification report showing how much the business would have paid in your retention layer. An important part of this exercise is to understand how much the business would have paid at different retention layers. We can look at deductible schedule credits and see how much premium is attributed to each layer of losses and begin to hone in on the optimal retention layer for client’s program. Two factors to look into while performing this exercise; 1) is the amount of scheduled credit premium the business gets for taking on the amount of risk and 2) the amount of losses that are in that layer. An insured may not choose to take on a certain retention layer if the schedule credit premium is not large enough, conversely, client may also not choose to take on a certain retention layer if losses exceed the schedule credit premiums. Performing a deductible optimization is one tool businesses can utilize to help select the right retention layer for client’s program.
While past results don't dictate future success, we can use that as a baseline to see how your program has performed over the past five years. We can use this data and pair it with a captive insurance company and run a five-year hypothetical proforma to see how business could benefit from taking on more risk over the next five years.
Partnering with the right carrier is crucial to businesses’ success. Many carriers will require collateral in the form of a letter of credit, or cash, to enable business to take on a larger retention or reinsurance position in client’s own insurance program. Carriers do this to protect their credit risk in the event of an insured default or inability to pay any claims assigned to the deductible layer.
As the commercial market continues to harden, and carriers begin to pull out of different industries, finding coverage becomes more and more difficult. Using a captive insurance company to take on more of businesses’ risks starts to make business less reliant on the commercial market. The less reliant the business is on the commercial market, and the more control business exerts over the programs makes the renewal process less frustrating and a lot smoother.
Grabbing control of your insurance program is not a short-term solution and you may not see immediate results. Being committed to controlling business insurance program is a long-term play. Also, if the program is structured correctly, the business should start to see a decrease in its’ total cost of risk in the long run. However, a difference between lowering the total cost of risk and premiums, while you may take control of the insurance program, while having the same commercial insurance premium spend year over year, by taking control of the business’ risk management program you are sharing in the underwriting profits that the commercial insurance company otherwise would have kept.
Even as the commercial insurance market starts to soften you will still be able to take advantage of controlling your program and continue to enjoy a lower total cost of risk by constantly improving business risk management protocols.
Having a captive insurance company as part of the insureds risk management program can provide many benefits both in the short- term and the long-term. Using a captive insurance company to insure part of businesses’ commercial program can provide financial benefits as it can be used as an efficient tool to build up a surplus which can be used to pay claims in an adverse year. Captive insurance companies provide flexibility to ensure things that are not currently available in the commercial market or may have been deemed too expensive to purchase through the commercial market. Once the business has an established captive insurance company it may be able to write insurance policies that are crucial to business and may only be needed for one year or a short policy term.
Many companies that had a mature well-structured captive were able to weather the storm of the most recent Black Swan event created by the COVID-19 pandemic. Having a healthy surplus enabled many of these companies to stay open while some had to shut down due to lack of resources.
Having an experienced team of advisors, and the right resources, are crucial to business making the decision to take control of insurance program and begin the journey to lowering your overall total cost of risk.
Management Services International (MSI), and its’ team of strategic partners can help determine what program will best suit the insureds business and its’ risk management needs. Contact us today to start the evaluation process.