I had the pleasure of leading a panel last month at the 2023 VCIA Annual Conference entitled, “Tips for Communicating the Value of Your Captive,” and it was a lively discussion with great takeaways I wanted to share.
Today’s economy is tough, and the insurance markets have hardened. As a result, organizations are in reactive mode, looking for combative strategies to mitigate bottom-line issues. A captive insurance program has long been a risk management tool that allows organizations to weather proverbial storms like these. For those organizations with a captive, risk managers might have to defend against a piggyback mentality from leadership or other stakeholders, because the current environment creates temptation to treat a captive like an ATM regarding surplus. In addition, goals and purpose surrounding a captive are likely to change over the years. As such, it’s important to be able to illustrate captive performance in tangible ways that will resonate with audiences outside the core captive team.
Captives as Problem Solvers
There is a time and place to leverage capital surplus from a captive, but a great strategy is to use that by pouring additional coverage and innovation back into your insurance programs. To do so, we recommend securing reliable relationships with your broker and actuary to understand your captive’s risk appetite, what problems could be solved via a captive, industry statistics and trends, and whether the risk is worth the reward for a particular initiative. TPA or data analytics partners are also critical to assess exposures and determine potential loss prevention measures. Lastly, your captive manager should serve as a valued second opinion and will help evaluate the ramifications of exposing equity in the captive to new potential losses.
The ultimate goal here should be to reduce the total cost of risk (TCOR).
To bring concepts to life, one of Spring’s clients used captive surplus to hire a return-to-work coordinator, which in turn improved overall disability and productivity goals. Another client worked to obtain sexual abuse & molestation coverage that was difficult to procure. A private equity firm was able to retain ransomware coverage after a significant claim hit and utilized the captive to buy down the retention for individual entities, mitigating premium increases.
Metrics to Consider
Every captive has different experience, objectives, and risks represented, so it is hard to pinpoint benchmarks that will hold true across every program. That said, there are some factors and calculations that should be top-of-mind regarding captive performance.
While numbers and hard ROI are often the priority, “soft” indicators, such as those listed below, should not be discounted.
- Goals achieved vs. intended purpose
- Ability of the captive to cover risks the commercial market will not insure
- Risk distribution
- Captive expansion
For the numbers crowd like our actuaries, below is a non-exhaustive list of metrics to consider when working to gauge your captive’s success.
- Loss & expense ratio (i.e., combined ratio)
- Captive premium increase vs. commercial market increase
- Volatility of earnings by captive line of coverage, and in aggregate
- Leverage ratio (net written premium to surplus should be around 3:1 to 5:1 or lower)
- TCOR overall
- TCOR vs. market increase
Given the difficult markets we are facing as an industry, we are stressing to our risk manager clients the criticality of captive optimization, but also the need to truly have a pulse on your captive’s performance and be able to illustrate it to a wider range of stakeholders who may be under financial pressure. If you could use assistance in developing customized key performance indicators (KPIs) for your captive program, or in diving into these qualitative and quantitative measures at an organization level, Spring’s consultants and actuaries are ready to help.
Our Managing Partner, Karin Landry was quoted in a recent Captive.com article on potential savings when switching to a captive instead of the commercial market. Check out the full article here.
In Captive Intelligence’s latest Global Captive Podcast episode (#91), our Vice President, TJ Scherer shares details about his new role at Spring and reviews his experience in the captive and P&C arena.
At the end of 2022, Vermont became the largest captive domicile globally with 639 active captive insurance companies. So, it was only fitting that the Vermont Captive Insurance Association (VCIA) had one of the biggest turnouts this year at their annual conference, which brings together insurers and reinsurers, captive owners and risk managers, regulators and other industry professionals to network and discuss current trends in the industry. This year the Spring team and I had the pleasure of once again exhibiting and speaking at the conference in beautiful Burlington, Vermont. Below are some of the topics that took the spotlight.
1) Managing economic fluctuation
From groceries to rent it seems like nobody can avoid inflation, which is no different in the captive insurance and risk management sectors. Due to increased claims, stricter underwriting and high healthcare costs, many employers are looking into alternative risk financing options to stretch the dollar. Below are some of the sessions from VCIA I found most pertinent when addressing the economic landscape.
– In a session titled “The Economic Landscape & Your Captive’s Investment Portfolio,” speakers reviewed how interest rates, inflation, and other economic indicators have changed the captive industry post-COVID.
– The session “Impact of Inflation on Your Captive” reviewed how rising inflation and supply chain interruptions are impacting the captive industry, and what we can expect moving forward.
2) Pitching captive insurance
Although captive insurance can increase savings, reduce risk, and lead to investment opportunities, C-suite and other stakeholders may be hesitant due to resources and risk. No matter how efficiently a captive program is designed, it can’t be maximized without buy-in from all parties. Here are some presentations I found most insightful on boosting communication.
– Two captive board members and a consultant presented on “Innovative Ways to Fire-Up Your Board,” where they provided tools and tactics to boost some life and creativity into captive board meetings.
– My colleague, Karin Landry was accompanied by a captive owner and a tax auditor to discuss the need for strong communication amongst risk managers, captive owners, board(s) and other parties to ensure the captive remains successful. The session included a list of recommended Key Performance Indicators (KPIs) for risk managers to have as a tool in their toolbox when illustrating captive performance to other stakeholders.
3) A look forward
In just the past half decade we’ve seen drastic developments globally including devastating climate events, a widespread pandemic and war spreading overseas. These events remind us that there are always factors beyond our control that can complicate established best practices, but VCIA speakers gave their views on what’s to come.
a) Prepping the next gen
As an annual attendee at VCIA it was great to see the sheer number of new faces and developing talent at the conference. This year VCIA made sure to include an array of introductory level sessions designed to solidify foundational captive knowledge for those entering the industry. Some of the sessions I found most intriguing include:
– A two-part session titled “(The) Newcomer’s Guide to the Captive Industry” brought emerging leaders together to express their unique experiences in the captive space and tips for others entering into captives for the first time.
– In an interactive discussion group on “Building Talent in the Captive Industry,” industry leaders discussed major workplace challenges and tactics for building a strong talent base that will one day drive the future of the industry.
b) The future of captive insurance
Although often thought of as a traditional sector, we continue to see innovative approaches to risk financing across employee benefits and P&C. Here are forward-looking presentations I found interesting.
– A captive owner and business professional explored recent innovations and solutions in the ‘captive insurance laboratory’ during their session, “Where Will Captives Go Next? The Latest Uses for Captives.”
– One group of speakers took an interesting approach and spoke on “Leveraging New Tech and Data Visualization Tools for Captives.” They reviewed how various stakeholders can utilize tech to bolster actuarial analyses and efficient decision-making.
As a regular VCIA attendee, I found this conference to be the most fun to date. Aside from all the happy hours, free giveaways and tasty meals, I had a great time reconnecting with industry leaders and deepening my knowledge of captives. On behalf of Spring, my colleagues and I enjoyed the opportunity to exhibit and look forward to next year’s conference. Lastly, I had the pleasure of being accompanied by a captive owner and stop loss carrier to present on risk management strategies that are impacting employer-sponsored health plans and the rising costs associated.
This year during the Vermont Captive Insurance Association (VCIA)’s 2023 Annual Conference, our Managing Partner, Karin Landry shared her insights on top risk financing communication strategies for CFOs and other executives. Check out Business Insurance’s recap here.
Captive Review has reported that Spring has acquired TJ Scherer from NFP. TJ will be taking on the role of Vice President and working with clients on the P&C and captive consulting. You can access the full article here.
Captives Insurance Times has reported that TJ Scherer has joined Spring Consulting Group and will be taking on the role of vice president. You can check out the full piece here.
Captive International published an article on Spring’s latest addition, TJ Scherer. TJ will be joining Spring as Vice President and will be working in business development surrounding P&C and captive insurance. You can find the full article here.
Chief Property & Casualty Actuary
I joined Spring in 2017.
I’m from rural Wisconsin, about 30 miles south of Green Bay.
As Chief P&C Actuary, I lead our property & casualty team at Spring. This consists of performing actuarial feasibility studies, captive consulting for new and existing captive insurance companies and risk retention groups, reviewing captive applications and actuarial reserving studies for regulators, working with Alera brokers on collateral analysis and reserve studies and other actuarial analyses, developing new business and maintaining existing client relationships.
Outside of Work Hobbies/Interests:
I enjoy being outdoors, outside of the office I like fishing, boating and traveling.
In my early 20s, I took 2 years of a method acting class.
Describe Spring in 3 Words:
Collaborative intelligent team.
Do You Have Any Children?:
Yes, I have 3 kids ages 24, 20, and 16.
If You Were a Superhero, Who Would You Be?