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MARKETING

Captives: Ideal for the middle market?

CRI program allows agents to become consultative advisors with their best clients.

By Michael J. Moody, MBA, ARM

Since their introduction to the insurance world, captive insurers had been viewed pretty much as an antidote for a hard market for Fortune 500 companies. The problem is that even today many agents and brokers believe that captives are the exclusive domain of the Fortune 500 companies. The fact is that nothing could be further from the truth.

Beginning in the late 1970s with the introduction of the risk retention group (RRG) legislation, Congress actually made it easier for groups of companies to write their product liability and completed operations coverage. Congress ultimately expanded the RRG law to be able to write any liability. Thus, forward-looking agents and brokers began to realize that the benefits realized by utilizing a captive should not be limited only to large corporations. As a result, captive growth over the last 20 to 25 years has been dominated by middle market accounts.

Problem solver

While RRGs over this time frame saw significant growth, their use was quite limited due to strict regulatory controls. As a result, the middle market was looking for a more complete, "turnkey" solution to its insurance needs. While several companies attempted to develop a "turnkey" product, only one such company, Captive Resources LLC (CRI), was able to design a program exclusively for the middle market. The key to CRI's approach was offering captive members the opportunity to control their insurance costs through the operation and oversight of member-owned group captives.

CRI developed a captive methodology that was tailored to the middle market insurance buyer. It quickly found that a member-owned group captive that was made up of members that were "best-in-class" and centered on proactive loss mitigation and claims management proved popular with owners as well as with agents and brokers. The CRI approach is based on a model that emphasizes a proven risk-financing formula that requires the member to invest or provide "skin in the game," while providing flexible, unbundled services specifically designed for the member.

Program success can be measured in many ways. However, members usually provide the best insight into the condition of the program at hand. Today, CRI oversees more than 25 captives of various sizes and makeup; some are homogenous captives, but the bulk of the captives are heterogeneous. Currently, its programs have in excess of 2,800 members and more than $1.2 billion in premium. While CRI has been successful for a variety of reasons, one of the key components of its success has been the 200-plus independent agents and brokers that work with the company to introduce the member-owned group captive concept to their clients.

ART market selection

The agents and brokers that work with CRI come from all parts of the country and in all sizes—from larger brokers like Wells Fargo Insurance Services to smaller agencies like The Odell Studner Group in Radnor, Pennsylvania. There are a number of reasons why these agents and brokers are interested in the CRI model, including the fact that CRI poses no competitive threat, as well as CRI's commitment to educate both the agent or broker and the member-owner. It is for these reasons that CRI captive membership has also grown from referrals from existing members. The fact that CRI can boast of having a member retention rate of at least 98%, year over year, also speaks to the value members place on the captive.

Peter Gernold, senior vice president of the First Niagara Captive Group in Buffalo, New York, puts it in simple terms, "We really only lose captive accounts when they get bought or sold or go out of business." For most agents and brokers it's the ability to retain "sticky business," says Doug O'Brien, who runs the captive and alternative business at Wells Fargo Insurance, Inc. "This is one of the points I always make with my colleagues; it's easy to maintain a 98% retention rate when you have happy clients that are in a vehicle that makes economic sense and delivers the type of broad coverage that meets their needs."

One of the issues that some agents and brokers continue to struggle with is the reduction of revenue that is sometimes associated with captives. The transactional costs, sometimes including commissions, are reduced in a captive; and if you are looking at just one account, the agency may suffer a commission shortfall. As Steve Odell, CEO of the Odell Studner Group, points out, "Yes, if you just look at it in the short term, they're right. You will make less income on a captive account." But you cannot just look at a captive arrangement as a single transaction," he continues. "You need to consider it from a long-term basis, since it can open the door to other captive business."

As Gernold notes, his department has grown to 11 people who handle just the captive business. He also points out that new business opportunities come from referrals from existing captive owners. For example, Gernold says that about half of their new captive business comes from referrals. And while referrals are nice, the captive has also kept business from leaving.

"We have saved a dozen-plus accounts, and we have won new business opportunities using the group captive solution," says O'Brien. Account retention is always one of the big issues that works in favor of the captives.

Additionally, CRI has also been responsive to the suggestions of its agents and brokers and has introduced several new products over the past few years to make the program even more attractive for prospective members. They have developed new products that many of the agents had been requesting: a one-stop loss product for self-insured health plans and another for employers who wish to take advantage of 831(b) captive formations. Both of these programs have been well received. As Gernold points out, "We really were big proponents of encouraging CRI to get into the 831(b) arena."

O'Brien says that his unit deals only with property and casualty coverage, but the 831(b) has developed a huge interest within their organization. "Just yesterday I had two calls regarding 831(b) captives."

And Odell has gone so far as to include both of these product lines as part of their future sales goals and anticipates hiring specialists in both of these areas. Most of CRI's agents and brokers have had a similar reaction to the new products.

At the end of the day, what is it that makes CRI so attractive to their agents and brokers? First and foremost, being able to offer a CRI captive differentiates the agency. But it is also a change in the relationship with clients. "The whole mechanism where you move to a consultative role rather than just an insurance salesman is big," says Odell. For Wells Fargo, O'Brien points out, "Now we can strive to be more strategic and consultative by utilizing a captive insurance company for a range of our clients' exposures."

Says Gernold, "You change the whole relationship with your client. It becomes a very consultative, collaborative relationship." Further, he indicates, "You get to work with above-average, 'best-in-class' companies. Can you imagine dealing with a member base that is made up of all great companies that have good people that want to control their programs and want to reduce their claims?"

Summary

Many agents and brokers still fear moving into the captive arena. For some agents who have moved into this area, there are many benefits to be obtained; but one of the best is the change in attitude between the agent/broker and the client. Gernold puts it this way, "We now have a commonality of goals." Additionally, O'Brien notes, "We now tend to be much more of a financial advisor or consultant with regard to our client base." And says Odell, "I am no longer a hired gun; I'm on the client's side. We don't even discuss insurance anymore."

At this point, the tea leaves are pretty clear; there is a hardening insurance market looming. Also clear at this point is the fact that the above- average accounts are no longer willing to subsidize poorer risks, and are moving to the alternative market. Viable, long-term risk management solutions such as those CRI offers to mid-sized accounts are an attractive option. When you do the math, only substandard accounts will be left in the traditional market. The only question that remains for most middle market agents and brokers is do you want to be a financial advisor for your clients or an insurance salesman?

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