By DENNIS GRUBAUGH
Given how some people feel captive to their insurance coverage, it’s ironic that something called captive insurance is increasingly finding fancy among Illinois businesses.
Such plans are appealing to corporate executives because of savings on underwriting services, including for coverage of worker’s compensation, property and casualty, and more.
Through its captive, Kankakee, Ill.-based Midwest Transit Equipment, the largest bus dealer in the United States, has saved 20 percent on all its underwriting services since 2010. It launched a “Stretch and Flex” program that requires employees to stretch for 10 minutes at the beginning of their shifts and after their meal break. The initiative has helped reduce injuries — and expenses, the company said.
According to the Center for Insurance Policy and Research, a captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owners. Captives are essentially a form of self-insurance.
Captives are formed to cover a wide range of risks, “practically every risk underwritten by a commercial insurer,” the center says.
Captives are like regular insurance companies, but they only insure their owners. The owners pay premiums to the captive, and the captive pays claims. Any leftover money stays with the owners or can be rolled over to cover future claims.
Captives have been formed by major multinational corporations and Fortune 500 companies, but they also have been formed by nonprofit organizations. Once established, captives operate like any commercial insurance company and are subject to state regulatory requirements including reporting, capital and reserve requirements.
The captive concept and name is credited to Frederic Reiss, a property-protection engineer who applied the idea to mining coverage in Youngstown, Ohio, in the 1950s.
The casualty group captive insurance industry was formed more than 30 years ago. By 2012, that group had hit about a billion dollars in premiums. But since 2012 that premium pool is much closer to $2 billion.
Today, there are over 7,000 captives globally compared to roughly 1,000 in 1980, according to AM Best Captive Center.
There are around 50 group captives operating in the United States. One of the most successful of those in the St. Louis market was formed in 1994, called Archway Insurance Ltd. It has 227 members and generates around $150 million in annual premiums.
Jeff Ziegler swears by his captive.
Ziegler is vice president for finance at Midwest Petroleum, an owner/operator of 57 gasoline and convenience food stores in the Greater St. Louis market, including 10 locations in Metro East.
Midwest has been a member of Archway since 2002. The company initially had work comp, general liability and auto in its plan and later added a second captive plan to cover property insurance.
While he could not speak to specific savings, Ziegler said he was impressed with “the structure. The attention they placed into management of claims. Sometimes you can get stuck in commercial insurance where you don’t manage your claims well enough.”
The convenience store industry faces many “slip and fall” claims from both workers and customers.
“You want to make sure you manage those appropriately,” Ziegler said. It gets to the point where you are settling them so quickly it becomes a word-of-mouth reaction. The more you manage your claims, the more you can prevent other ones that aren’t legitimate. You’re managing your own money, so to speak, on claims.”
Educating the workforce is key. Midwest, which has nearly 500 employees, has a reporting process in which staff are required to immediately deal with the situation, handling it appropriate for customers or workers.
Witness statements are a crucial part of the fact-gathering, if those apply, he said.
The captive insurer offers risk-control workshops to help educate staff, Ziegler said. Claims handlers from his operation can mix with counterparts elsewhere to learn about best practices.
Webinars are offered on a monthly basis, he said.
Ziegler said he researched going back to a commercial carrier after he came to the job in 2010, but decided against it, based on the success the company had had with Archway.
“We took it to bid. To see what commercial would be,” he said. “I could not find a commercial carrier to bid based on how we were doing vs. what they could offer us.”
Captives continue to displace commercial insurers in some markets as more employers utilize a captive and the range of exposures insured by captives continues to broaden.
Duke Niedringhaus, of St. Louis-based J.W. Terrill (part of the Marsh & McLennan Agency network), serves as the insurance broker for Midwest Petroleum and about a dozen other companies that participate in Archway, which is one of many group casualty captives in the market. He’s also on the board for Self Insurance Institute of America.
Members come together to create their own insurance company, and the coverage is considered portable.
“If Jeff goes out and makes an acquisition in Kentucky, the captive goes along — to any state in the country,” Niedringhaus said.
He said group casualty captives represent about a $2 billion premium market, and the retention rate of members is about 95-99 percent.
Member premiums are only based on the last five years of loss history. In Midwest Petroleum’s case, an actuary takes those loss numbers and factors in the sales and payroll and vehicle count to arrive at premiums.
“Jeff’s premium funding is only based on his history,” Niedringhaus said. “That resonates well with a lot of entrepreneurs who like to chart their own course on insurance costs.”
Under Archway’s captive, all the remaining profits and investment income get returned and distributed back to the members. Roughly 71 percent of the premium that Midwest pays each year goes to funding losses. And about 29 percent is for the fixed cost of the captives.
“Usually within five to seven years the members get all the distributions for a given policy year,” Niedringhaus said.
The captive goes out and buys reinsurance for catastrophic losses and needs what’s known as a fronting carrier to do so in order to write insurance coverage in every state.
Archway was created by St. Louis area companies in 1994 and now covers every state in the country. Archway is known as a heterogenous captive. Unlike homogenous captives that serve as insurers for specific industries, Archway cover a diversity of companies of similar size —convenience stores, hotels, manufacturing, construction, staffing, retailers and the like.
“They all have a common purpose, managing claims,” Niedringhaus said. “But there is a combination of self-funding and risk sharing involved. There is a significant opportunity to create insurance profits.”
Captives are becoming a more common conversation among businesses, “but there are still a lot of companies out there who are spending $300,000 to $500,000 every year sending that premium off to an insurance company, and the insurance company retains all the profit and all the investment income,” Niedringhaus said.
By contrast, it costs about a minimum premium of around $150,000 for mid-size businesses to get into a group captive.
“Basically it enables these midsize companies to get the benefits of what the Fortune 500s do,” Niedringhaus said.
Captive insurers have helped reduce worker’s compensation costs by teaching businesses how to handle accidents and injuries. That’s a big deal in Illinois, where worker’s compensation premiums are 27 percent higher than the national median. Workers comp is among the top five expenses for most businesses.
“The captive gives us insight into ways we can protect ourselves,” Ziegler said. An auditor will come to his stations and identify potential risks.
“Whether it’s outside in curbs or parking areas or inside in how back offices are set up,” Ziegler said. Something as simple as having sufficient “wet floor” signs is important, he said.
Midwest Petroleum made a concerted effort to increase the number of surveillance cameras that can track station movement.
“We’ve also added new DVR systems, which increased the capacity to store video. Now, we can go back 90 to 180 days. You can look up to 32 different camera angles.”
Midwest has been able to weed out a number of fraudulent slip-and-fall cases as a result of the video footage.
“We can mitigate those quite easily when we can clearly show there is something that is not a fault of ours.”
It has also been quite a deterrent to theft, winning praise from local police departments, Ziegler said.
He said he is such a fan of the captive concept that he frequently talks about it to other convenience store operators.