We would like to congratulate Prabal Lakhanpal for his recent promotion to Senior Vice President at Spring. We are glad to have his positive and driven personality on our team! Check out Captive International’s full recap here.
After a two-year hiatus, it was great being able to attend The Cayman Captive Forum in person this year. As the Cayman Islands is the second largest captive domicile, and the first for healthcare captives1; it is the perfect location to share leading trends in the captive world, and the warm temperatures and tropical views made it all the more enjoyable. If you weren’t able to attend or could use a refresher after returning to the “real world,” this quick recap might be of interest. Below are some of the buzziest topics at this year’s conference.
1) Tax Updates
On large attraction to captive insurance (and certain domiciles) relates to tax advantages. It’s complicated, though. Some of the tax-focused sessions presented at the conference were:
– Mike Domanski, a lawyer from Honigman LLP, discussed offshore federal tax considerations and U.S. tax reporting requirements in his session titled “Captive Insurance: Basic Tax Fundamentals.”
– In a session titled “The State of Tax: What You Need to Know,” experts discussed U.S. federal tax updates and how taxes will be affected by the Inflation Reduction Act and updates to Section 831(b).
– The penultimate presentation titled, “U.S. Tax Update” tackled IRS and compliance updates in the U.S. on both the federal and state levels.
2) Cyber Risks
Since the start of the pandemic, employers had to adjust to remote and hybrid workplace policies. This transition forced employers and employees to rely more on digital tools to conduct day-to-day operations and made organizations more susceptible to breaches. This is not the first year that cyber took the spotlight, but there were some great discussions around risk in this area, including:
– A session titled “Placing Cyber Liability in Your Captive” reviewed current trends in cyber treats and how insuring cyber in a captive can prevent devastating losses.
– Risk and Cybersecurity experts from the Cleveland Clinic explained why the healthcare industry commonly falls victim to cyber attacks and outlined steps to take to protect patient and caregiver privacy in their session, “Current & Future Cyber Risks In Healthcare: ‘Will you still love me, tomorrow?’”
3) Healthcare-Specific Coverages
In recent years, we have been seeing an increasing number of healthcare organizations leverage their captive to bring new and industry-specific lines. At this year’s Cayman Captive Forum we learned about how captives can be used for the following emerging and alternative risks:
a) Medical Malpractice/Medical Errors
As the Cayman Islands is the most popular captive domicile amongst healthcare organizations, there was a large focus on healthcare-specific risks. There was a particular emphasis on how healthcare employers can reduce and prepare for potential medical malpractice/errors as noted in the following sessions:
– Presenters from the “Criminalizing the Clinical Defendant: Straight from the Headlines” session facilitated a mock deposition to address common medical malpractice trends and how they should be addressed.
– A session titled “Can your Captive Eradicate the Impact of Covid on its Medical Malpractice Program? Will It Ever End?” reviewed how medical malpractice can impact claims and legal outcomes.
– Dr. Dan Shapiro Ph.D., explained his experiences with burnout in the healthcare industry and steps employers can take to support healthcare workers in his presentation “Labor Shortages, Employee Burnout & Medical Errors: Working Together to Improve Results.”
b) Workplace Safety & Patient Care
Workplace safety is another non-traditional captive line (outside of employee benefits and Property and Casualty [P&C]) gaining traction. Healthcare organizations and, more specifically, healthcare workers and patients are prone to violence and discrimination more so than staff in other industries.
– In the session “Workplace Violence in Healthcare,” Trinity Health’s Diane Moritz explained initiatives their captive board are taking to prevent workplace violence injuries and support victims of patient violence.
– Children’s National Hospital’s Chief Diversity Officer, Denice Cora-Bramble discussed biases in data reporting for diverse patients, and experiences minority patients face when seeking health services in the session, “DEI Impact on Quality and Safety of Care.”
– I was joined by lawyer, Michael Domanski in a pre-recorded session titled “Using a Captive to Fund Long-Term Care,” during which we reviewed the current LTC market and different captive models (both taxable and tax-exempt) that can cover long-term care policies.
As we transition into a new era of captive insurance, this year’s Cayman Captive Forum acted as a perfect vehicle for addressing current and future themes in the industry. It was a strong end (almost) to an exciting year and we look forward to next year’s conference to continue these and other important discussions. Our team was fortunate to be part of the action in the Cayman Islands this year and is here to answer any questions you may have related to an existing or new captive program. Check out our captive expertise here and let’s chat!
As seen on Alera Group’s Insights Page
In the cyclical market for Property and Casualty Insurance, we are more than a year into hard-market conditions, leading growing numbers of businesses to consider alternative risk funding. That, in turn, has created an abundance of work for insurance actuaries and Captive Insurance consultants.
OK, that’s a lot of insurance speak for one paragraph. Let’s unpack:
— A hard market for insurance is characterized by a rise in rates, a reduction in options for coverage, heightened scrutiny by policy underwriters and reduced carrier capacity for coverage limits. A combination of catastrophic weather events and so-called “nuclear verdicts” in liability lawsuits — as well as the cyclical nature of the Property and Casualty (P&C) Insurance market — were the driving forces behind the hardened conditions before the onset of COVID-19, and the pandemic exacerbated matters. Rate increases have leveled off to some extent in 2022, but, in general, most conditions in the market remain unfavorable to consumers.
— Alternative risk funding — also known as alternative risk financing or alternative risk transfer — is a mechanism for providing coverage by means other than commercial insurance. Types of alternative risk funding include Captive Insurance programs, in which a business or group of like businesses creates and funds its own private insurance company to cover one or more risks in the realms of both P&C and employee benefits. Workers’ Compensation, General Liability, Auto, Professional Liability and Medical Stop-Loss are the more common coverages to start with when insuring through a captive, but captives often expand into a funding mechanism for many of an organization’s other lines of insurance, including Cyber and Umbrella (also known as Excess Liability Insurance).
— Insurance actuaries use math, statistics and financial models to analyze the cost of risk and determine how much money a company should pay to protect itself against risk. All insurance carriers employ actuaries to help set policy premiums and limits. Some insurance agencies work with actuaries to negotiate policy details with carriers or, in a captive arrangement, to determine a premium that will cover claims and, in the long term, reduce the insured’s total cost of risk. Captives have the advantage of also building up retained earnings over time and allowing companies to take on more risk, generating additional insurance cost savings for the parent. Among multiple P&C capabilities, actuaries who work with or for an agency also educate clients on the cost of risk and how to manage it.
Now that we’ve cleared that up, let’s talk about the role of an actuary in managing the cost of risk and protecting your business with a customized insurance program — whether you’ve chosen to pursue alternative risk funding or not.
Why an Alternative Solution? And Why Now?
Business leaders know all too well about the hard market for Property and Casualty Insurance. Just as the pandemic began to wane early in 2022 and there were some signs of casualty rate increases leveling off, Russia’s invasion of Ukraine escalated supply-chain disruption and fuel shortages, accelerating the rise in economic inflation. Damage resulting from Hurricane Ian only made matters worse, of course, driving reinsurance — insurance for insurers — into what the Bank of America termed a “true hard market” of its own, with rising costs getting passed on to consumers. These issues have led to overall increases in U.S. P&C industry combined ratios over the past few quarters, sparking further rate increases for certain lines.
It’s no wonder more organizations are looking at captives and other alternative risk-funding solutions.
“Overall, between 2017 and 2021, captives added $4.3 billion to their year-end surplus while returning $5.8 billion in stockholder and policyholder dividends, representing $10.1 billion in insurance cost savings over purchasing coverage from commercial market third parties.”
“The number of U.S. captives continues to rise, although the growth of captive formations was tempered by the onset of economic uncertainty resulting from the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements.”
“However, these adverse conditions can serve to highlight the benefits of the captive segment and provide businesses an incentive to establish them,” said Fred Eslami, associate director, AM Best.
“‘This current environment allows captives to customize coverage for risks that may be uncommon or difficult to write or place in the standard market,’” Eslami said.
The growth in Captive Insurance has led to an increasing willingness on the part of carriers to work with captives and regard them as partners rather than threats, increasing options for captive solutions. And even if an organization in the end chooses to forgo alternative risk funding – either for an entire P&C program or for individual coverages, such as cyber or commercial umbrella – simply exploring an alternative and having it as an option can improve its position in the insurance market.
Actuary Capabilities: Your Data, Your Future
For insurance agents and brokers, designing an insurance program tailored to your industry and company is as much art as it is science. Working with an actuary enables you to incorporate greater amounts of empirical evidence into evaluating risks and determining insurance solutions: Here’s what the numbers demonstrate about your situation now, and here’s what our analysis shows about how you’ll perform using this solution.
While any good broker will work to design an insurance program customized for your business, a broker working with an actuary will be especially well-equipped to design a solution tailored to your unique needs and goals. Among the key issues an actuary can help brokers work through are:
- Determining appropriate retention/deductible levels to help the client reduce the total cost of risk;
- Estimating client retained unpaid claims liabilities at quarter/year-end;
- Estimating carrier letter-of-credit need for a large deductible program;
- Estimating possible retained loss outcomes at various confidence levels;
- Performing a captive feasibility study.
Many brokers work in silos, taking a vertical approach in evaluating risk based on industry. Actuaries generally don’t distinguish by industry; they analyze across various industries, focusing on each individual client’s loss history (including frequency and severity), claim status, policy details, exposures and risk-control program before determining financial projections for the organization. Taking the long-term view allows for consideration of fluctuations in company and market performance over a period of time, and increases the likelihood of long-term savings and profits.
Optimizing Your Insurance and Benefits Solutions
As companies grow, they generally reach a point where their claims experience is predictable across one or more lines of coverage. Able to determine such predictability, an actuary can then help you:
- Minimize your total insurance spend, directing more money to the coverage your business needs the most.
- Reduce spending on the risks you have under control. This is where alternative risk funding becomes viable.
If you’ve reached the point where your business is paying, say, $100,000 to $250,000 in annual premium, a group captive might be the best solution because you probably aren’t yet structured appropriately to meet the insurance tests required to form a single-parent captive and the economies of scale may not be there for a single-parent captive solution. In such a case you may need to diversify your risk with other organizations (heterogeneous or homogeneous) — in a group captive or in a shared-risk pool solution utilizing reinsurance — for at least the time being.
The bigger, more complex, more diversified a company becomes, the more a fully funded, single-parent captive emerges as an optimal solution in which the business is insuring only its own risk. A single-parent captive also allows for more coverage flexibility and transparency than a group captive program. Quite often, both benefits and P&C risks are insured by a single-parent captive.
What drives the decision to move from traditional, carrier-based insurance to a captive program is savings and, ultimately, return on investment (ROI). How? By moving expenditures that create carrier profits into the captive solution. Captives are highly efficient, with very low expense ratios, unlike carriers. Free from providing a carrier with underwriting income and investment income on held reserves, you’re able to retain this income to ultimately generate a profit and facilitate an insurance mechanism that competes with the commercial market.
An Organization-Focused Approach
In taking an organization-focused approach toward financial analysis, actuaries look not only at funding for Property and Casualty Insurance but also at spending on employee benefits. Most captive insureds will see annual savings between 10% and 40% for premiums that flow through a captive instead of the commercial market.
As we approach the end of the year, Alera Group invites you to the final event in our 2022 Engage series of employee benefits webinars, A Look Ahead to 2023: Hot Topics and Trends. Join us on Thursday, December 15 as we discuss benefits financial officers and HR professionals need to think about now — including alternative solutions — as they plan for the year ahead.
ACCESS ALERA’S WEBINAR HERE
As the Cayman Captive Forum starts just this week. We are proud to announce Spring and our consultants have been recognized for multiple awards from Captive International’s Cayman Awards 2022. We look forward to continuing to do excellent captive work in all domiciles, including but not limited to the Cayman Islands.
Spring has been awarded for:
Spring Consulting Group provides a wide range of Captive Services when it comes to the Employee Benefits and Property & Casualty (P&C) industries. In this Whitepaper, you can learn more about our captive services and how we approach captive implementation/optimization.
Captive International has released the winners for the 2022 US Awards. Spring is proud to announce that our company and our Managing Partner, Karin Landry were selected as winners for Best Feasibility Study Firm and Best Feasibility Study Individual (respectively). We were also highly commended for Best Actuarial Firm, Best Individual Feasibility Study (Prabal Lakhanpal) and Best Actuary (Peter Johnson).
A (Brief) VCIA Session Recap
I had the pleasure of speaking at Vermont Captive Insurance Association (VCIA) Annual Conference last week, joined by two colleagues with impressive backgrounds. Jeff Caudill, Director of Risk Management at Haskell and a client of Spring’s, and Mary Ellen Moriarty, Vice President, Property & Casualty at College Insurance Company (EIIA) joined me to discuss different ways that captives can be used to tackle the hard market hurdles we’re currently facing in the insurance industry.
With myself as the moderator and consulting actuary, Jeff representing a brand new single parent captive, and Mary Ellen representing a veteran captive, it was a well-rounded panel that pulled in multiple perspectives.
The Clouds Behind the Hard Market
This visual does a great job at illustrating the many challenging atmospheric effects in the insurance air right now, particularly on the property & casualty (P&C) side of the fence (no pun intended). With Mary Ellen representing the higher education space, we felt it important to highlight unique risks that colleges and universities are grappling with, in addition to the other complicating factors (or clouds) we see here.
In my work I’ve seen that this climate has resulted in increased carrier profitability for certain lines over the last couple of years, such as auto liability, but decreased carrier profitability in others (such as cyber and commercial property).
In higher education, Mary Ellen explained there have been hard market consequences due to underwriter inability to achieve profitability, and as noted in the visual, they are dealing with risks many organizations don’t need to think about, like traumatic brain injuries, the general public accessing the property, and a different kind of medical malpractice. As a result, there are a limited number of carriers willing to provide coverage in this space. As a nod to captive advantages, EIIA was able to grow surplus from their captive prior to the hard market, from 2002 to 2022, which has been extremely helpful in this “stormy environment.”
This success story led us to a discussion around the business case for captives, a snapshot of which you can see here in this video.
Jeff then gave a bit of a play-by-play regarding the process, implementation, timelines and driving forces behind Haskell’s decision to switch from a group captive to a single parent captive (a synopsis of which you can find in this case study).
Both Jeff and Mary Ellen described some next steps for their captives, which may include writing in:
- Integrated deductible plans
- Directors & officers
- Employee benefits
- Other P&C lines
Food For Thought
Like most good things in life, you kind of had to be there to get the full experience and maximize your take-aways. So I don’t want to give it all away, but I will leave you with some food for thought that came out of the Q&A for the session. If you want to know the answers, please get in touch!
- With a newer captive that hasn’t had time to build up surplus yet, how do you think about keeping your captive adequately capitalized?
- What are the next coverages or exposures you see on the horizon for higher ed that you would like to add to the captive program?
- What were the key drivers for your CFO to be on board to establish the captive?
- Can you talk about how reviver statutes have impacted obtaining/maintaining abuse coverage?
- As we face uninsured risks like communicable disease, how do you assess the use of the captives together with unique insurance solutions like parametric options? What is the value pitch to the organization?
- What type of coverages perform well in the hard market and why?
- Does forming a captive in a hard market only make financial sense if your company’s loss ratio is below the industry average?
- How do you handle cyber in a captive? Do you have a TPA on retainer?
- Are you using the captive for deductible reimbursement? Do you take any quota share or excess layer risk?
- What does your auto exposure look like and what risk mitigation strategies have you implemented (via the captive or otherwise)?
- How do you market your captive to new members who may not understand captives? Especially in light of the hard market, where captives are especially attractive.
And last but perhaps most importantly:
- What do you think the impact to the insurance market will be if the Browns win more than 2 games this year?
As you can see, we can have some fun in the captive world, and much of it was had at VCIA! Before you leave, check out our captive business case video here, inspired by this presentation.
Our Chief P&C Actuary, Peter Johnson participated in a panel discussion at the Vermont Captive Insurance Association (VCIA) Annual Conference on hard-hitting solutions to hard market concerns. Check out this article in Captive International which summarizes key points of the discussion.
Cell Captive Overview
A protected cell company (PCC) is a legal entity that can be considered as a condo of insurance. A PCC facilitates a turnkey solution for companies by offering clients an individually protected cell that is insulated from the risk of other cells within the PCC; each condo operates as its own captive (with certain restrictions) and does not share risk or rewards with the other condos in the building (PCC). PCCs can vary in type and operational structures. The underlying principle of a PCC is that they are established by a sponsor that funds the capital required by the core. The sponsor is also responsible for ensuring other captives operate within the business plan parameters of the PCC. Clients benefit from a PCC as they spend less time and resources on the operational and establishment activities for the program.
When cell captives were first introduced to the market, they were largely in the form of unincorporated cells, where participation and service provider agreements worked to protect the sponsor’s investment rather than through structural protections.
The model for cell captives has evolved to allow more control for cells with the establishment of incorporated cells. Incorporated cells allow cells to even have their own Board of Directors at the cell level.
Regardless of the type, any cell captive structure allows constituents to benefit from pooled administration, but not from pooled risk, as each cell is independent. Sometimes a company will own multiple cells within the PCC, which are all treated individually.
Cell captives are attractive risk funding vehicles because they offer:
- Easy entry. Cell captives are turnkey and can be established quicker and in a more efficient manner compared to standalone captives.
- Economies of scale. Administrative savings are generated as the costs are pooled across cells.
- Professional captive management. Typically, cell owners can be fairly hands-off with built-in program management.
In addition to being a great solution for small and mid-sized companies, cell captives align with a range of other use cases and can be flexible in structure and purpose, for example:
- A captive owner may want to reform a pure captive into a cell captive to allow different Joint Ventures of the parent company to be insured through cells jointly.
- An organization can use a cell captive to separate higher risk areas of the business, without impacting the rest of the captive. For example, each business unit could head up an individual cell. For instance, an organization may view it advantageous for senior management of each of its subsidiaries to own cells that insure the subsidiaries they manage. In this case, each entity, whose risk profiles may vary greatly, would have its own cell that is run independently but still in favor of the parent organization.
Cell captives were once most commonly leveraged by mid-sized companies entering captive funding for the first time and seeking lower barriers to entry and extra assistance. While still a great fit for mid-sized companies, market conditions are driving more and different types of organizations toward cell captives.
The Surge in Cell Captive Demand
In more recent years, we have increasingly seen large multinational organizations entering the cell captive space, in establishing and owning the entire structure as part of their enterprise risk management strategy. In addition to the basic cell captive advantages listed above, other driving factors that may be of interest include:
- A lower required upfront capital investment, as compared to a standalone captive
- Greater ability to meet different business objectives at once, as well as to adapt
- It is simpler to add a cell to an existing program than it is to set up a new single parent captive for a different line of coverage. On the other hand, it is also relatively easy to “phase out” a cell that was insuring a critical risk two years ago, but that risk or the level of need is no longer there today.
- While all captives offer flexibility over commercial market solutions, cell captives are unique in that each individual cell can be in the form of a reciprocal, a risk retention group (RRG), a limited liability company (LLC), a non-profit, and other types without the need to match each other
- The ability to write third-party risk while leveraging capital and surplus from an additional captive program
Hard insurance market conditions as well as the landscape for emerging risks are making cell captives even more attractive. While often a good fit for more traditional lines, more and more cell captives today are being used for risks like voluntary benefits, cyber insurance, and excess liability. Further, more domiciles have passed cell captive legislation in recent years, opening doors to many.
As with any assessment regarding alternative risk financing, always start with a feasibility study. While cell captives are growing in popularity and advantageous for many, a thorough analysis of the pros, cons, and other contributing factors specific to your organization, its risk and its objectives, is necessary before any decision is made.