Aside from a conventional commercial insurance policy, captive insurance is one method a business can use to cover its risks. A captive insurer, as its name suggests, is one that is owned and controlled by the entities it insures.
According to Martin Eveleigh (pictured), chairman of Atlas Insurance Management, captives are able to offer businesses many advantages. The most obvious, he said, is the ability to lower the overall cost of risk by structuring an insurance program in the most effective way possible, thereby choosing at what level to transfer risks to the commercial market.
“The captive then provides a mechanism for the financing of retained risk whether that is a primary or an excess layer,” he said. “For many captive owners, one of the more attractive benefits is the control that it gives them, from coverage and pricing, to cash flow and claims handling. The ability that the insured has to determine for itself which claims to contest and which to settle can be a significant advantage. In addition, having a captive allows for policy language that provides coverage tailored to the specific needs of the insured.”
Eveleigh added that the formal structure of establishing a captive to manage retained risk can serve to improve the company management’s focus on risk management. For board members who may not be concerned on a day-to-day basis with a company’s risk management and insurance function, a captive can provide a very visible measure of the financial effectiveness of the business’s risk management efforts.
Addressing businesses’ risks through captives
According to Eveleigh, the type of risks captives address depends on the nature of the captive owner insured’s business – what it does, how large it is, where it operates, and other factors. One common type of risk among many captive programs, however, is liability.
“For employers in manufacturing or construction, workers’ compensation is likely to be a major component of the captive program, whereas for a professional services firm or medical practice, coverage for its liability to those it serves may be a greater consideration,” he said. “Certain types of businesses face considerable challenges in obtaining effective, affordable coverage in the commercial market. Trucking, for example, is a challenging industry as a whole, and certain specific sectors within it, such as petroleum and chemical transportation, logging and waste collection, find buying insurance especially difficult. This is a problem that can be addressed through a captive program for auto liability exposures.”
As for property risks, Eveleigh said that captives can also cover various risks in this area. These include ocean-going tankers, fleets of commercial vehicles, commercial real estate, and others.
“Usually, an insured which covers property risks in its captive will have a considerable number of risk units,” he said. “Without that, the risk is too concentrated and the premium to overall exposure ratio doesn’t make sense. The law of large numbers needs to apply, at least to a point. The availability of reinsurance for catastrophic losses will also often be a key consideration.”
Furthermore, captives can also help in addressing emerging risks, Eveleigh said.
“Over the last ten years or so, risk managers have consistently identified reputational risk as a major area of concern,” he said. “Think of the damage to Wells Fargo caused by its sales practices, Toyota’s lost sales and the damage to its brand following the 2009/2010 recalls and Boeing’s current problems after the crashes of two 737 MAX aircraft.”
According to Eveleigh, the commercial insurance market has been slow to provide effective coverage for reputational damage and brand rehabilitation, but on the other hand, captive insurance companies have been providing coverage for these risks for some time. Considerable exposure to loss of income from various risks not adequately covered in the standard commercial market can also be effectively and efficiently addressed by a captive.
“Cyber exposures are also being covered by captives and we can expect captives to lead the way in covering emerging risks associated with blockchain and other distributed ledger technologies,” he said.
Atlas Insurance Management is a full-service captive insurance company manager with captive clients in 12 domiciles in the United States and offshore, and was founded by Eveleigh in 2002.
“We focus on solutions and service and we particularly want to build long-term relationships with clients whose values align with ours and who are forward-looking, creative, entrepreneurial, and fun,” he said. “I believe that the technical skills required to manage one kind of captive are essentially the same as those needed to manage another; so we can, and do, manage all types of captives. What we really enjoy is being part of the solution.”
The companies managed by Atlas range from group captives, small or large single-parent captives, agency captives writing program business, profit-centre captives, and others.
Eveleigh said that the key to effectively bring value to a captive owner is to listen and be able to understand the problem that the captive is expected to solve or the opportunities that it allows the owner to seize.