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2012 Vermont Captive Insurance Association Special Section

Captive resources for mid-sized brokers

Rising interest in captives will only grow stronger as market hardens

By Michael J. Moody, MBA, ARM

In the last few years, the insurance industry has seen phenomena unlike anything in the recent past. Historically, it had been marked by periods of growing premiums and periods of falling premiums. While the length of time between these pricing extremes is typically far from a specific point in time that you could set your watch by, generally it is thought of as being a seven-year cycle. In times of soft premiums, corporate insurance buyers would take maximum advantage of market conditions and would frequently lower retentions and increase limits. When pricing began to harden again, the opposite would be true. Obviously, this approach rarely turned out to be the best long-term strategy to "manage" risk.

However, it now appears that the infamous "seven-year cycle" may have become just a footnote in insurance history. Despite the fact that the past 10 years or so have represented some of the softest rates in memory, interest and activity in the alternative risk transfer (ART) market has continued throughout the last 12 years. In fact, captive feasibility studies and formations have never been higher. Many captive domiciles are enjoying unparalleled growth.

As a result, large international brokers have developed turnkey captive service capabilities to address these needs. However, mid-sized agents and brokers are also developing similar capabilities via the use of independent, third-party service providers. Initially, some mid-sized agents moved into the captive arena, primarily out of a defensive posture. Some were concerned that their larger commercial accounts might be susceptible to competition from larger brokers' captive units. However, those days appear to be over as more and more mid-sized brokers see the competitive advantages that captive capabilities can provide their agencies and are developing strategies to capitalize on this.

Rising interest

While mid-sized brokers saw the advantages of captive capabilities, they also quickly found that regardless of the internal resources that they could assemble, few could compete head to head with the bigger brokers who had much larger budgets to attract quality talent. They realized that a critical element to their long-term success in the captive market is directly tied to identifying quality service providers that they could partner with.

Forward-looking service providers have also become aware of the needs of the mid-sized agents and brokers and have begun developing strategic plans to help educate them to the numerous opportunities this market contains. One such service provider is SIGMA Actuarial Consulting Group ( According to Tim Coomer, SIGMA's CEO, this has been their approach to business for quite some time. However, over the past 12 to 18 months, they have implemented several specific strategies to assist brokers in developing and augmenting their captive capabilities.

Last year, for example, Coomer points out, they introduced an assessment tool that assists the brokers in determining the need for actuary support. This assessment tool, which is known as the "Powered by SIGMA portal," was developed through face-to-face meetings with mid-sized agents and brokers throughout the country. The portal reflects what many of them indicated were chief concerns regarding the best way to use an actuary to compete in the ART market.

This year, SIGMA has expanded the assessment systems they make available to mid-sized agents. Coomer notes that with the assistance of James Girardin, president of Amethyst Captive Insurance Solutions, SIGMA has been able to design a "captive assessment tool." He notes that like the original assessment tool, "the captive assessment tool is available via agent's portal on SIGMA's Web site."

Coomer and Girardin both point out that input into the development was again made possible by direct discussions with a large number of mid-sized agents and brokers. Girardin says that while the assessment product is not designed to provide anything close to captive feasibility study, "its primary use is to determine if a company is a candidate for a captive. Obviously, there are many variables to a decision like that. Every organization has its own unique set of circumstances driving the decision about whether or not to form a captive, but this will help the mid-sized broker determine if they should actively consider a captive for one of their current accounts or prospective clients."

Many in the insurance industry are still trying to determine why mid-sized commercial accounts have been showing so much interest in the alternative market. While there are many answers to this question, Coomer notes that, based on his discussion with mid-sized agents, part of that answer is, "There is a growing level of sophistication, both on the part of the brokerage community and the buyer." Brokers and agents now have access to unlimited amounts of data, thanks in large part to the Internet. And, Coomer says, "The same is true of the buyer side." Today, starting a captive is no longer considered the exclusive domain of Fortune 500 companies, and most agree that it is relatively commonplace within the insurance/risk management community. Even mid-sized corporate management has become aware of the benefits of captive ownership.

Coomer also points out, "Some of the turmoil at the larger brokers over the past few years has led to some pretty sophisticated brokers leaving the large agencies and ending up at a Top 100 broker." While these brokers may have significant experience working with alternatives or even captives "they don't necessarily have the support resources required at the mid-sized agent and broker." Thus, "Developing relationships with quality, independent service providers is extremely important for these brokers."

Girardin states that the quality service providers are rapidly changing to meet the increasing demands of these more sophisticated consumers and brokers. He notes, "You are starting to see more of a push for analytics, which is a natural evolution as a result of significantly more data being available to the buyer." The question, he says, "is what you do with all this data; hopefully its use provides better insight that can lead to better decisions for the corporate insurance buyer." More specifically with regard to captive management, he notes: "Most captive managers have moved far beyond bookkeeping and ledgers that they were originally known for, and they now are starting to take advantage of statistical resources by offering a more analytic matrix. Captives and actuarial data are connected since they are in similar platforms," he points out. Thus, he says, it's important that the actuary and captive manager have a close working relationship.


One only has to look at the increasing number of new captives that have been formed during the soft market to see the potential that a hardening insurance market will provide. If mid-sized agents and brokers lack internal resources to effectively compete with the larger brokers in the captive arena, they will need to develop substitute strategies to take advantage of the hardening insurance market.

One of the best methods for agents and brokers to do this is by aligning with quality, independent third-party service providers such as SIGMA and Amethyst Captive Insurance Solutions. These service providers are as interested in educating the agent's or broker's staff as they are in providing the needed services to the broker's clients. By using these independent service providers to supplement their current staff, agents and brokers can take advantage of current market conditions without having to add to the agency's overhead.

The growth of captives over the next few years is a foregone conclusion. Much of the interest in the captive alternative is coming from the mid-sized "Main Street" accounts. Mid-sized brokers have an opportunity to begin forging the relationships that will enable them to compete successfully in the captive marketplace.


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