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.

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.”