SECTOR FOCUS: CAPTIVES
A captive audience More and more clients are looking for captive insurance solutions, but are agents and brokers ready to step up?
ance solutions, including manufacturing, healthcare, construction, retail, professional services, energy, religious organizations, and colleges and universities. The flexibility provided by captives make them an appealing option for all types of organizations. “The ability to design and customize the risk financing program to fit the unique needs of each company or group of companies can make exploring a captive opportunity worthwhile to a large number of organizations engaged in any number of industries,” Meehan says.
Why captives? ALTHOUGH CAPTIVES are generally perceived as being more the domain of risk managers than brokers and agents, the captives market represents an untapped channel for many insurance professionals. It’s a market that provides brokers and agents access to a client base that previously might have been out of their reach.
and seeing little in return. Organizations that join a captive are able to take control of their insurance business and gain access to shared risk management resources. “Captives can be an excellent risk financing tool for organizations of many different sizes, engaged in all sorts of businesses,” says Mike Meehan, a 25-year industry vet and consul-
“The ability to design and customize the risk financing program to fit the unique needs of each company or group of companies can make exploring a captive opportunity worthwhile” Mike Meehan, Milliman Group captive insurance solutions sit between traditional guaranteed-cost policies and self-insurance solutions and represent a solid option for middle-market commercial clients looking for an alternative to the unpredictable, cyclical insurance market. Clients who have recorded years of minimal losses can understandably grow frustrated with paying premiums into a corporate pot
tant in the Boston office of Milliman. “We often see organizations that have an existing large-deductible program explore forming a captive. In addition, companies with exposures that are unique or difficult to insure through the traditional market may also consider a captive alternative.” Meehan sees clients in a wide range of industries gravitating toward captive insur-
As with all forms of self-insurance, captives offer a number of benefits and risks. Having the ability to customize the insurance policy to fit the specific needs of an organization is a major advantage. For group programs, the potential for better cash-flow management and the ability to retain any underwriting profits and investment income are also attractive benefits. There are a number of other upsides of captive solutions that are often overlooked, Meehan explains, including the ability of an organization to better manage and maintain their data, and possibly insure third-party risks, which could allow for the retention of additional underwriting profits. Organizations considering a captive should be fully aware of the potential costs and hazards before they commit. “First, since the captive will need to be capitalized, the organization is tying up capital that could otherwise be put to a different use,” Meehan says. “Also, instead of underwriting profits, there could be an underwriting loss in any given year or years. For these reasons, it is important to make sure that the policies are properly priced and that appropriate levels of reinsurance are in place. In general, when set up correctly, captives can be a great risk financing tool.” As with the more traditional areas of insurance, the captives market is ever-
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