The broker's role
Keystone Insurers Group prepares members for the hard market with a captive alternative
By Michael J. Moody, MBA, ARM
The commercial insurance market is poised for price firming, with
some lines like workers compensation already showing such firming. It appears
that 2012 may be the turning point. And once rates begin to rise, interest in
alternatives typically follows.
While growth in the alternative risk transfer (ART) area, in
particular captive insurance companies, has continued despite the prolonged
soft market, renewed interest is already starting. This renewed interest
frequently puts some brokers in difficult positions. For some mid-sized agents
and brokers, it is their larger accounts that may well be the best candidates
for an ART market program. As is often the case, these accounts are usually the
biggest revenue producers for the agency. As a result, brokers frequently find
themselves asking, "Where do I go from here?" and "What is my role for those
clients that should be considering alternatives like captive insurance
Middle market activity
Unlike earlier captive formations that were frequently limited to
Fortune 500 type organizations, the middle market accounts have been targeted
in this current captive movement. Dennis Silvia, president of Cedar Consulting,
points out that this frequently results in mid-sized agencies trying to
determine where they fit into this new movement. He says, "Brokers see this
current movement in one of two ways: offensively, where they can use it to
contact current clients and prospects; or defensively, where they only want to
protect their current book of business."
Regardless of which direction they choose, Silvia says, at the
bottom of both, the broker must decide, "Does the client have the type of
account that should be involved with a captive insurance company?" In either
scenario they must be able to act as a trusted advisor, determine whether this
is a good deal, and detail the advantages and the disadvantages to the client.
While a prospect for a captive can arise in a number of ways, he
indicates that, "The most common situation is one where the client is not being
treated appropriately by the traditional insurance market." However they
arrive, it is important to make certain that the prospect understands the
details of the captive alternative. The agent or broker must be able to speak
intelligently about them. Thus, Silvia says, "It is incumbent on the broker to
fully understand captives and how to use them." He adds, "Unfortunately, a lot
of brokers keep their eyes closed to the potential" that captives can provide.
One organization that has taken advantage of the current captive
movement is Keystone Insurers Group (Keystone). According to Joe Joyce,
executive vice president, property & casualty insurance, Keystone is a
franchising organization made up of 230 "partner" agencies across seven states.
Joyce notes that Keystone has "worked diligently over the past few years to
educate our partner agencies to the advantages of captives. We have also
invested resources in formation of our own captive, Keystone Advantage, Ltd."
Keystone Advantage is a segregated cell captive domiciled in Bermuda. "It is
available to the Keystone partner network for their exclusive use." He notes, "This
allows our partner agencies to be able to offer their clients/prospects a
captive alternative, should they desire one." The Keystone partners own the
captive by virtue of their stock ownership of Keystone Insurers Group. Joyce
further points out that the idea to form the captive was advanced by the
Issues can arise
Silvia notes that frequently "middle market agencies lack
sufficient internal resources to support an ongoing involvement with captives.
As a result," he says, "in order to move to more of an offensive position, they
need to bring in some sort of outside expertise." Silvia suggests a careful use
of this approach since the long-term success directly correlates to the parties
involved. The agency must exercise due diligence in this area since this is the
most important aspect of moving into the captive market.
Outside service providers will usually take one of two approaches
when dealing with the brokers' prospects. "Some organizations," according to
Silvia, "will go out of their way to make certain that the agent continues to
maintain the relationship with the client/prospect, and these are the types of
organizations with whom a broker wants to partner." Under these circumstances,
Silvia adds, "the agent should be able to build a stronger relationship with
the account that has moved to a captive. However, that is not always the case."
The opposite can also be true, Silvia continues, because "some
providers will try to minimize the agent's relationship with the
client/prospect to the point where the agent no longer has a meaningful
relationship." These situations can also arise if the outside resource turns
out to be a "one trick pony," as in a "captive provider that can offer only one
type of captive structure in a single domicile."
Joyce states that "Keystone agents are offering captive
opportunities to enhance the relationship between the broker and their client
or prospect." In these cases, Keystone Advantage, Ltd. is a resource to the
partner agency that works as an extension of the agency. At this point, Joyce
indicates that a partner has several options with regard to the type of captive
the partner wishes to develop. Among these are:
• Agency captive
• Program captive
• Single-parent captive
• Homogenous group captive
• Heterogeneous group captive
While it is anyone's guess as to when the current soft market
will actually end, Joyce says, "We thought it was important to have the captive
established during the soft market." That way, he states, "We will be ahead of
the curve as the market hardens."
The current soft market has not slowed the movement to captive
insurance alternatives. In fact, most would agree that it has done little to
impede its progress at all. This is an important fact for mid-sized agents to
keep in mind. For the most part, the traditional insurance market has failed
its good accounts, and they are leaving them ripe for competition from the
captive arena. As the market hardens, it will be difficult for mid-sized agents
to continue to ignore this trend. As Silvia points out, "A key element when
approaching current clients and/or new prospects is to be able to use the
captive option to enhance their risk transfer position."
Joyce states that being able to provide a captive alternative to
our partners' clients and prospects is a very powerful tool. "For many of these
agencies," he says, "the captive is a technical tool for what the agency is
strategically trying to do." He notes, however, "It is just one part of an
overall strategy for our partner agencies."
Without question, captives change the relationship between the
agent and their client. "If done properly," Silvia states, "you can have a
client for life. The key is in the selection of outside resources that keep the
agent front and center with the client and allow the agent to take the credit
for the captive development process." Thus, as is often the case, "You need to
pick your partners carefully." On a long-term basis, agents need to make
certain that they are not being marginalized by the outside resources.
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