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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 companies?"

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 partners.

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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