Category Archives: Captive Insurance

Chemical Formulator Leverages Captive to Reduce Premiums at Appropriate Risk Level

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The last few years have been a challenge for businesses and their insurance brokers in trying to navigate what is considered a hard market for commercial insurance.

Several factors drive a hard market, but typically we see shrinking reinsurance capacity resulting in restricted limits and coverage and higher premiums. What was unusual with this hard market was that property was primarily the line of coverage that was leading the hard market.  As a result, companies faced huge increases in premium for the same limits and terms, if those could be obtained. Or firms were forced into a large deductible at reduced limits and coverage in order to keep their premium at the same level.

Premium to Rise 4X

One of our clients, a specialty chemical products formulator, faced such an undesirable situation at their property insurance renewal. The CFO of the company approached us seeking our advice on how they could use their Captive Insurance Company to help reduce the sting of their property insurance renewal during this hard market. They had received word from their broker that their property premium was going from just under $200,000 annually to approximately $800,000 for the same limits and coverage terms.

The Game Plan

We suggested that our client ask the broker to obtain large deductible options from carriers in the commercial market that would be willing to offer that type of program.  We would then have the Captive provide a Deductible Reimbursement Policy for the chosen deductible to fully cover the deductible amount or a significant portion of it.

The broker was successful in getting a carrier to underwrite the program with a $1,000,000 deductible, which was what the client desired.  The commercial carrier issued a policy for the full limits desired with a $1,000,000 deductible as the initial layer that the client would be responsible for.  The client saved approximately $441,000 in premium with this option.

Selecting Appropriate Risk Level

The client then decided that their risk tolerance was $250,000 per claim, so they requested that the Captive write the Deductible Reimbursement Policy at $1,000,000 with a $250,000 deductible.  In other words, the captive would cover the $750,000 excess of the $250,000 retained by the client on a per-claim basis.  The premium for the Deductible Reimbursement Policy was approximately $175,000, so the net premium savings was approximately $266,000.

The client was able to deduct the premium for the Deductible Reimbursement Policy, just like they would for any of their other commercial premiums.  Therefore, they were able to achieve significant premium savings while having the coverage they desired for their risk tolerance.  They would also be able to capture profits from the favorable loss experience of the Captive while maintaining the deductibility of the premiums paid.  We felt this was a positive outcome for the client, who was in a difficult situation; this case demonstrates how valuable a captive can be.

I Am in Health Care: Every Day Is a Gamble

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Dr. Barbara McAneny, CEO and President of New Mexico Oncology Hematology Consultants, LTD, has long been an advocate for captives and their ability to offload risk while reducing commercial insurance companies’ premiums that vanish from her practice’s bottom line.

In the winter of 2024, her practice along with other medical practices faced a major challenge.  Due to a cyber breach involving one of the medical industry’s largest claims processors, Change Healthcare, her practice could not process their patient claims immediately.

Dr. McAneny had upcoming payroll looming for almost 300 employees as well as other payables, such as buying chemo drugs for their patients, with no incoming cash from Change Health. The inability to process claims and secure cash flow would impact her practice for 16 weeks.

Fortunately, Dr. McAneny and New Mexico Oncology Hematology Consultants, LTD operated a private captive insurance company, which had built up cash reserves to mitigate for such a risk. Dr. McAneny leveraged the captive by accessing its surplus in order to help mitigate further loss due to the cyber breach.

In addition, the medical practice has coverage through the captive insurer for additional expenses.

Not all medical practices had the ability to mitigate risk for such a major event; some practices needed to be sold as they were not able to insure the risk of the cyberattack and loss of receivables for several  months.

Dr McAneny also appreciates captives for their ability to mitigate the risk of punitive damages which traditional insurance does not cover. Since the captive was created in 2011, it has protected the practice from many risky events.

Dr McAneny started working with Capterra in 2021 after gaining an understanding of the true role and value of a Captive Manager.  Speaking of service providers, she continued, “There are ones that say why you can’t do it, the others find ways to provide solutions in a safe, compliant way.  I need someone to think with me and be creative in mitigating uninsured risks of my practice.”

The Value of Captive Insurance in the Age of COVID and During Other Trying Times

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By Jeff Ellington, SVP, Capterra Risk Solutions

The last two years have been challenging for most businesses.

  • COVID-19 and subsequent strains left most business owners scrambling to just stay in business while figuring out a way to keep their customers and pay their employees.
  • From an insurance standpoint, businesses were already dealing with rising insurance rates and shrinking capacity from a hardening market, particularly with regard to property coverage. Then COVID hit, leaving most business owners facing the dire realization that the insurance they paid so much for did not cover business interruption resulting from COVID exposures.

In dealing with the disbelief that their insurance policy would not cover their losses due to COVID, some owners decided to sue their insurance companies to force them to pay.  A few plaintiffs in certain jurisdictions found sympathetic judges who did try to force payment, but the overwhelming majority held that the property policies issued to these owners were not intended to provide coverage for losses related to a pandemic, as the policies were written to provide coverage for direct physical damage.

Let’s face it, having to expend the resources of time and money to sue an insurance company and then wait for a judgment and any subsequent payment is not an ideal situation for a business trying to survive.

 

So, what’s a better solution? 

A captive insurance company can be established to insure the risks a company retains, either by choice or by the fact that they cannot find suitable terms in the standard commercial market.

Many smart business owners have set up captives to efficiently transfer the risks they have retained as an effective complement to their standard insurance program.

These same owners were comforted by finding during the COVID crisis that their captive insurance policies provided coverage for loss of income from business interruption from exposure triggers that did not involve direct physical damage to their property.  Situations such as work stoppage from governmental mandates and contingent business interruption from the permanent or temporary shutdown of the business’s suppliers or other dependent entities were covered causes of loss in policies written by many captives.  Additionally, exposure such as the permanent loss of a key customer or a key supplier, as well as a legislative or regulatory change, even globally, could be covered by captive insurance.

 

Captives have value beyond catastrophes

A catastrophic event like a pandemic is not the only challenging situation for which a captive could provide relief.

As mentioned above, the current commercial property and casualty insurance market has continued to harden, resulting in higher rates and premiums coupled with reduced capacity and product availability.   Just a few short years ago, the market was extremely soft with rates and corresponding premiums very favorable for business owners.

With some policies being priced at less than 50% of the standard premium, it did not make much economic sense for a business to take on a significant deductible as a layer of self-insurance when the reward did not justify the additional risk.   Although there are sound risk management reasons for taking on a layer of risk, such as a greater focus on causes of loss and maintaining a safe and efficient work environment; let’s face it, these reasons were not compelling enough to outweigh the economic impact of taking on a significant amount of risk when premiums were already so favorable.

Fast forward to the current hard market, which continues to harden, and businesses are seeking to take on a meaningful layer of risk to control costs and secure the terms of insurance they require.  In some cases, particularly with property, businesses are being forced to take on high deductibles to obtain coverage with a reduced benefit in the form of premium credit.  So, business owners are looking for a way to reap the maximum economic benefit for the significant level of risk they are taking on.  And again, a captive could be the best solution for progressive business owners.

By forming a captive and purchasing a deductible reimbursement policy from the captive to cover a large deductible assumed by the business, owners have the advantage of deducting the premium paid for the deductible reimbursement policy, just as with the premium for the standard commercial policy to which the deductible applies.

As an insurance company, the captive can establish reserves, or if it qualifies as a small insurance company, it could choose to just be taxed on investment income and not on underwriting profit.  Both these scenarios are much more advantageous than paying for claims within the deductible layer with the retained assets of the company or through a loss fund.  Additionally, the risk management benefits mentioned above can now be realized and further enhance the value of insuring a large deductible through a captive.

Although businesses will undoubtedly encounter additional trying times in the years ahead, captives will remain as lucrative vehicles, enabling business owners to successfully navigate the risk and insurance challenges they face.

Sandra Fenters to Be on Panel @Western Regional Captive Insurance Conference

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Tuesday, June 28th, 11am-12 noon.

A Deep Dive into the 4 C’s:

Captives, Control, Consolidation, and Changes

This course will assist service providers in understanding the impact of various captive arrangements on the financial statements and tax returns of captive companies. The ability to communicate the impact of various captive structures, including collateral issues on the financial statements of the insured is an important consideration for financial reporting and tax reporting, whether a separate account, protected cell, incorporated cell, single parent, group captive, or RRG. After attending you will have an overview of the impact of various captive structures on the financial statements of the captive owner/insured.

PANELISTS:

  • Leon Rives, Chief Visionary Officer, RH CPAs

  • Kevin Doherty, Member – Insurance Law Practice, Dickinson Wright

  • Sandra Fenters, President, Capterra Risk Solutions, LLC

  • Nate Reznicek, Head of US Distribution, International Re

A full conference agenda is available here.

Sandra Fenters Debuts on Power 50 List of Influential Captive Professionals

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Capterra Risk’s President lands on the Captive Review Power 50 list in 2022.

The Power 50 is an annual list from Captive Review of the 50 most influential captive insurance professionals from the last year.

Captive Review summarized Sandra’s nomination in the following:

President of Capterra Risk Solutions, Fenters and her team manage a number of both national and multi-national captive structures. Passionate about the captive industry Fenters was on the faculty for the University of Delaware’s captive program, and often authors articles on captive insurance. A former broker Fenters has a wealth of experience and is making an impact in the industry.

Fenters began her insurance career with a large international insurance company as a surety underwriter. Her experience spans multiple disciplines including surety, professional liability, commercial liability, and high net worth personal lines insurance. Sandra is an active member of the Self-Insurance  Institute of America, Inc. (SIIA) and sits on committees specific to captives and advocacy. She is joining the Board of Directors of the North Carolina Captive Insurance Association (NCCIA) in 2022.

Congratulations to Sandra and her fellow nominees.

IRS Drops Case against Captive Puglisi Egg Farms

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The captive insurance arrangement has been targeted by the IRS in recent years. An autumn court win is a highlight in this long-running battle; it is a victory not only for the captive taxpayer but also for the captive insurance industry.

Puglisi Egg Farms, an owner of a 831(b) captive insurance company, argued that the taxes and fees leveled by the IRS were unfair and unsubstantiated. The IRS decided to drop the fees and taxes before the decision would be announced by the court.

This comes on the heels of a May decision by the US Supreme Court that the IRS does not have special privileges that other government agencies also do not have.

We are pleased to see these cases land on the side of the captive companies. Congratulations to Puglisi Farms. To read more, click here.

 

Captive Insurance Brings Peace of Mind to Houston Business

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Client Concern/Issue:

The principals of a Houston-area furniture retailer and interior design firm sought better control over potential business risks that its commercial policies were not covering.

Capterra Solution:

The firm launched a captive insurance program in 2013 to mitigate these risks.

Over 8 years the program has been called upon to cover a number of such claims.  The policy not only covered damage and business interruption losses from Hurricane Harvey, but it also paid claims on lost business due to a key employee exiting the company.

Capterra Risk’s Exceptional Support

The principals value Capterra’s deep expertise in risk mitigation and understanding the retailer’s requirements of their captive program. “Capterra allows us to focus our attention on our business with the ‘peace of mind’ that Capterra has our captive program fully covered.  They rigorously track the program’s details, keep us in full compliance, and update us on regulatory changes that affect our captive insurance company.”

Results/Benefits:

COVID-19: Illustrating the value of captive insurance

The captive program really showed its worth in spring 2020 when COVOD-19 shut down the United States economy. While US government programs did provide some payroll support, the business still suffered closures and significant delays, leading to lost profits. The captive’s Contingent Business Interruption policy paid a significant claim to cover these losses. This claim would certainly have been rejected under a commercial policy.

 

Construction Firm Appreciates Risk Mitigation of Captive Insurance

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R.D., Controller of a privately held Pennsylvania-based $150 million construction firm, initiated a review of all the firm’s providers in 2017.  Insurance brokers were asked to complete a comprehensive RFP.

One of the areas the Controller looked to improve was the construction company’s risk mitigation efforts with the possible use of captive insurance.  She traveled to the Cayman Islands to gather more information of this potential risk mitigation tool.

After deciding that a captive plan met the construction company’s goals, R.D. conducted due diligence of 3 captive insurance consulting firms. The construction company selected Capterra Risk Solutions based on its comfort with the team. The construction firm recognized that there are various risks in any business decision, but R.D. is confident that Capterra is a talented partner constantly working to keep the captive in compliance.

R.D. commented that the captive plan provides the following benefits for their Company:

  • Helps risk mitigation as captive covers previously uncovered risks
  • Creates potential to capture underwriting profits with strong loss mitigation techniques
  • Builds awareness of potential claims, risks, and exposures, resulting in improved operations

“Our expectations of launching the captive have been exceeded. The Capterra Risk team keeps us updated on changes in captive regulations and squarely within compliance with the Tennessee Department of Commerce & Insurance.

“We like that Capterra is appropriately cautious. And they encourage us to get involved with activism.”

R.D., Controller, Pennsylvania based Construction Firm

Captive Insurance Pays Off Over the Years for Specialty Chemical Maker

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10+ Years of Captive Coverage

The owner of a specialty chemical manufacturer has long utilized a captive program to mitigate company risk.

As a business owner, R.L.E. must look at the big picture and consider long-term decisions including purchasing insurance and best practices in risk mitigation.  With Company exposures in mind, the owner is constantly looking for products to help shore up uncovered or undercovered risks in the business his grandfather started two generations before. R.L.E. first learned about captive program benefits in a Vistage group and began working with Capterra Risk Solutions President Sandra Fenters in 2010.

At the time, the CEO found that his Pennsylvania-based Company could not purchase a policy insuring environmental pollution liability with a traditional insurance carrier. He found that a captive program could write a policy to insure for that risk as well as many other uncovered risks.

“We view our captive as a competitive advantage against our competitors.”

Captive Insurance during  COVID

More recently, during the COVID-19 pandemic, the chemical manufacturer had issues with its supply chain and struggled to get specific packaging parts delivered on-time or at customary prices to produce the company’s key consumer products. R.L.E. found it had to pay premium prices and to airfreight the pieces to his factory in order to fulfill customer orders. The additional expenses caused by the extraordinary situation were insured by a policy written by the captive; they would not have been reimbursed by their traditional insurance policies. The owner comments “After 10 years and as illustrated by the pandemic, our captive continues to serve our risk mitigation needs.”

“We view Capterra Risk Solutions as a very efficient team that serves our needs well. They know the industry and counsel us to ensure our captive is in compliance with regulations.”

What Brokers Really Need to Know about Working with Captive Managers

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Sandra participated on a panel discussion at the SIIA 40th Annual National Conference & Expo in October titled “What Brokers Really Need to Know about Working with Captive Managers.”

Park Eddy from Active Captive Management and Ken Kotch from Ryan, LLC joined Sandra on the panel.  The panel discussed how the Broker and Captive Manager work together to best serve their joint clients.

Major Takeaways from Panel

Sandra and her fellow panelists highlighted these points:

  • The market is hardening: The panel discussed the hardening market where clients are seeing rising premium rates (20+%), reductions in limits and capabilities, and cancelation increases. All of this hardening is in absence of significant claim payouts.
  • Speak as one unified voice to the client: Captive Managers partner with brokers to fill in gaps in coverage for the client. It’s critical that the broker and captive manager provide one valuable solution, delivered in one consistent voice.
  • Eliminate duplicative coverage: After filling in gaps in a client’s coverage, it is key for the team to cut products that are overlapping.
  • Brokers benefit from working with captive managers: A complete risk mitigation solution leads to a happier client whose captive company fills in gaps in coverage as well as potentially being a profit center. Also, fruitful broker relationships with captive managers create access to a broader network of professionals that is likely to provide the broker with new business opportunities.
  • Captive Managers often fill the role of a quarterback: We are creating an insurance company so a number of qualified professionals with specific skills such as actuary, legal, and tax need to be brought to the team. Captive Managers have the expertise to recruit and coordinate these disparate functions to deliver on best practices.
  • Accounting experience for Captive Manager: Sandra recommended that accounting expertise, especially tied to insurance, is particularly valuable for this leader.
  • Recent business interruption losses due to COVID shutdowns are a big issue: Many brokers have unhappy clients who have suffered losses due to the pandemic. Given that traditional insurance is typically not paying business interruption claims, captive insurance can cover these losses. This should be attractive to brokers’ clients.
  • Code of conduct important for clients and brokers: Sandra discussed her work on a SIIA committee that created and distributed its code of conduct for Captive Managers. Clients and brokers should assess a Captive Manager’s adherence to these principles.
  • Quarterly claims reviews are important: Firms get busy and often neglect to make the appropriate and required claims for losses. These reviews are significant to ensure that a captive insurance company is taking on the required financial risk transfer within a company.

SIIA members can view the complete webinar on SIIA’s Canoe site.

Brokers are encouraged to contact Sandra for more discussion about these best practices. Sandra can be reached at sfenters@capterrarisk.com.