麻豆映画

Intro (00:01):
You're listening to Digging In, where we dig into the insurance topics, trends and new surrounding all things agribusiness. Here's your host, Bruce Droz.

Bruce Droz (00:18):
Hello everybody, this is Bruce Droz. I am the vice president of agribusiness for 麻豆映画 Company. And I'm here today with Seth Madnick, who's the managing director of our captive group and Jay Thebaut who program underwriting manager in the captive group as well. Today, we're going to talk about captives a little bit, which is the area of expertise of our guests here today. And I'd like to start off the conversation by asking a question. Now we've heard a lot about pretty big increase in captive formations recently, presumably as a result of the tough insurance marketplace that we're all dealing with, what's your experience been along those lines?

Seth Madnick (01:00):
Bruce, it鈥檚 interesting. As the market has become tighter, harder in various lines of coverage, including agriculture, there is an increased activity of captive insurance and formation. Primarily it's driven by clients who want to fund or manage a part of their insurance risk. So, I guess the bottom line is yes, we're seeing an increase in activity and it's really businesses that feel they perform better than their peers. When you think about why should I go into a captive or risk sharing arrangement, you want to step away from the standard insurance market and own and manage part of your insurance risk. So, as the marketplace is driving higher and higher price on various lines of coverage, it's really driving an trust of lawyers or business owners to say, why don't I own or manage part of the risk myself. If you think about insurance as financing a risk, you're either going to pay it to an insurance company to take a hundred percent and you walk away or you can own or manage part of the risk yourself and share the premium and the opportunity really of the harder market of the, of the price increase. This is driving on a number of coverages in the agriculture space. And Jay and I have been involved in actually licensing what we call a single parent captive in. Owned by an individual agriculture group and also working with group cap that we just licensed a, a large agriculture captive last month, March in Arizona for one.

Bruce Droz (02:24):
And, I'm curious about you, how you would describe the profile of a company that's maybe the best candidate for a captive. You just mentioned that it's maybe most appropriate for those that are outperforming the industry. Can you maybe define that a little bit and then expand on who really makes a big candidate for a captive.

Seth Madnick (02:44):
Typically, a good candidate. You have to look at a couple of things. You have to look at your historical premium and losses. How is the business performing to the amount of lost dollars that you're paying are being paid out? There's a few just, I would say metrics or baseline measurements that you look at, you're paying it for every dollar and premium that you're paying. What are your losses, your loss ratio, as a percentage of your premium, the losses are running about or 60 of your premium. So that's, if you're running hotter than that, and you're probably not a good candidate. Another one is size; you need a certain critical mass to own your own captive because of the frictional cost of running an insurance company. If you think about a captive, what it really is, is a specialty or niche insurance company.

So, you need to have a certain critical master size to cover the operating expenses of that risk. In that case for single parents, you're typically to 2 million premium clients who participate, and we call group captive. They have premium below that, but they're sharing risk with other agricultural accounts are always in the same industry segment. They're typically a minimum of three to 5 million premium on the group as a whole. So, there's size, there's losses. There are also coverage issues. The insurance market, getting hardware, certain lines of coverage are just disappearing. The clients just can't buy the coverage, whether it's pollution, catastrophic coverages, we're seeing such of wind, other areas of liability, especially on the foodborne illness side, where the marketplace is simply just driving deductibles so high or limits that from a coverage standpoint, it's just not there. So, a captive is used to fill gaps in the coverage.

Jay Thebaut (04:23):
I was inclined to add also to that profile of a candidate is a client that obviously is outperforming in terms of profitability. So, it's not an account, that's lost prone and isn't spending a lot of money on claims activities. So, success point earlier, when a company just makes the decision to become a captive, they're essentially becoming their own insurance companies. Therefore, are inheriting those claims that would've otherwise been paid by an insurance carrier. So, they become the insurance companies, typically a successful captive, or a company that becomes successful in a captive is one that has a risk management minded approach to, of managing their business. So, they take very seriously the types of mitigation of claims and controlling the claims. They want to have a real stable profitability and, and premium output. So, they're not looking for big swings in their annual premiums and they can control that component. So, it doesn't work for everyone. But if you have a client, company that's interested in managing all these different facets of their company and then, and enjoying the profits associated with keeping claims down that's a really good indicator that the cap is going to fit for that type of an organization.

Seth Madnick (05:35):
And I agree and think about it from an insurance placement. You're really underwriting management. If you think about it, cause the management a commitment to preventing losses and their money do happen to manage those losses cost effectively is key. If you're just looking at if the employer or the business owner is just looking at insurance as a way just to pass, just to fund risk without being active in safety and loss control. And it tends not to work, you're not going to achieve the financial goals of captive. You have to have a commitment and have a team, whether it's the Alliant risk management services and Ag as we鈥檝e seen or internally, or a combination, a real commitment to risk management, safety loss control, cause you're really financing that risk. And it's the layer it's that working layer of risk that typically goes into the captive and you buy excess protection from the insurance market, but you're really taking on the concept that me as a business owner, that I can manage or put resources to managing and mitigating risk in my business operation, I know it better than anyone else and I I'm going to help manage those risk dollars and sharing the rewards of that. So, that commitment by management's essential.

Bruce Droz (06:44):
So, you've hit on a couple real interesting things there from the dollars and cent standpoint, in terms of our performance of their peers. You also touched on what I would consider maybe the personality of the company or the personality of management in terms of their risk management focus. What about risk tolerance from that personality standpoint of a company? What can you talk about in terms of, is it a concern to take on too much risk or how can that be dealt with when evaluating a captive on the part of the company?

Seth Madnick (07:17):
That's a really good question. Because there's no one factoring funding, a captive or just structuring it. You have to have someone of an entrepreneurial spirit to do a captive to fund it. And there is capital required just like funding, any investment in an any company, really funding an insurance company. So, there's a capital requirement. In addition, you have to fund what level of risk that the employer or the business thinks they can manage. And what does the data show statistically that should go into the captive? So, you have to have a commitment, not only for year one, but for years, 2, 3, 4, and 5. You think captive is not a short-term play to lower your premium. It's a long-term play to manage your total cost at risk and lower your costs. You may not pay less premium year one, year two, year three, because when you think about funding, a captive you're funding, it's really three components.

When you fund a captive, it's your projected losses, your operating expenses of running the captive plus whatever collateral you have to put up or capital to fund the captive or collateralize with what we call a fronting company of an rated paper in front of it, you typically need a name brand insurance company for regulatory reasons or lender reasons. So, there's a collateral requirement just like in a large deductible policy. So, you think about those three elements of funding. You have projected losses you're paying for operating and collateral. So, then the question is from the business owner standpoint, what's the net cost of that versus what they're paying now in the marketplace. And am I going to fund that? Do I have the ability to fund that for several years as the collateral builds up and levels off? So, there's a risk tolerance, the ability, how much risk am I going to take on?

What's the cost of that risk? And that's not static that can change from year to year as the owner builds up surplus or capitalization that they can take on more risk over time, but you have to have a mindset. You need to be willing to fund that risk. Now the flip side of that, the owners are already paying for that today anyhow. When you pay a premium, a dollar or premium you're paying for that risk transfer to an insurance company. So, what really is, you're saying, I'm going to take a portion of the risk transfer dollars I'm paying out or insurance company and put it in my own company. I'm going to make an investment in that company and investment in my business that I can perform as well or better than if I'm paying to the insurance company. Any money left overstays with my captive insurance company. So, that's the economic bet that they're making.

Jay Thebaut (09:45):
I was just going to make a comment that there there's going to be expense and money output that they wouldn't be necessarily taking on in a standardized market. You know, to Seth鈥檚 point, there is some trading of the dollars that occurs. And, so I think there needs to be some degree of economic wherewithal within a company in order to get through those first several years of building a captive and managing those expenses that come with a captive and funding for losses and taking on those retention layers that they may not have had to take the same extent in the standardized market. So, if a company is short on liquidity and cash and or short on just money in general. Cap may not work in the short run for them, but it is a great solution if there is a strong financial basis to the company.

Bruce Droz (10:31):
Good point, it kind of goes back to that profile. We were talking about on the optimum candidate for a captive. So, a strong balance sheet probably should be on that list as well. I'd like to move the conversation in a slightly different direction. You talked earlier about kind of two basic types of captives, a single parent, and a group captive. If a company is interested in flooring captive, what should they think about in terms of looking at single parent versus group?

Seth Madnick (10:57):
So, the single parent captive is typically the well capitalized, larger company or company that has north of a million-standard premium on their own. In addition to that, they may have a number of operating entities inside of the captive group itself. There could be multiple businesses. It doesn't have to be just one company. It could be, we call a brother, sister relationship or sibling, or you have a number of operating entities, the same economic family. They would have to think about the ability to take on that risk of themselves and share that and have that with capitalization. And they would not be sharing risk with anybody outside of their economic family is a trade off in that it's strictly insular to their own experience. The flip side of that is, or the downside is there has to be the element of we call insurance where there has to be risk transfer, risk distribution.

So, you need to make sure that there's an element of insurance risk sharing among the operating manager. The group captive is typically we see with midsize, small-midsize clients, as Jay was talking about in terms of size and liquidity or clients who do not want to take the risk into capitalizing or funding, their insurance company. It's sort of a step in for the larger companies or all in, for a midsize company where you sharing risk. And it can be either with the same industry group or segment or with various industry groups or segments. So, that's another issue on groups. If you're getting into a group captive, who you sharing risk with the positive side of it is you, you're not having to fund it yourself and you get share risk at the expenses of other people, the downside is you have to share risk with other people too.

So, look at who you're getting into business with. And if they're in the same industry segment, as you let's just say agricultural similar industry and type, you probably have more comfort level. Because the risk profile of the accounts or the businesses are very similar. There might be peers in your industry and you know, it, you're sharing risk with other types of business you are, but there are group captives where they have a host of industries. You can have everything from sheet metal to manufacturing to retail. And in that situation, the risk profile of the accounts are different. And you may have some higher hazard industries in your captive that you may not be comfortable sharing risk because one of the things on the group captive is, well, there's always a component of the business captive you. There is a requirement to share risk among the members. So, that's a plus and that's a minus and you just have to be buyer beware. Look at who you're, you're being asked to share this risk with.

Bruce Droz (13:33):
So, let's say that my company is interested in, in looking at a cap to be it single parent, be a group. What would a typical timeline be Seth or Jay for just kind of start to finish of I'm interested today and that's the start finish being I'm in some sort of a captive, what kind of timeline do you typically see?

Jay Thebaut (13:53):
This is Jay. I mean it ranges is it ranges depending upon the complexity of the company, in terms of maybe the different numbers of coverage lines of business, that would be theoretically going into a captive, but by and large we would look at around a four to six month horizon. Some of that time in that four to six month is spent in the analytical stages of doing what we call a feasibility study. And basically with a feasibility study, we look at their historical experience of the company and we work with our in-house actuaries to look at both the adverse and expected loss projections. And that number is really the foundation for what we would refer to as the loss pick, what would be expected to be paid in losses in a given year. So, we spend a good amount of due diligence in the first 30 to 45 days, working on a feasibility study, that document is not only gives us an idea of the funding component of a expense component of a captive, but it's also the requirement of most of your domiciles where the where all of your domiciles, where the captive is going to be housed, whether it's offshore and a Cayman island or domestically at Arizona or Vermont doesn't make any difference.

You still need to feasibility study. That would be the first piece of that. And then there's the implementation phase, which can take 30 to 45 days depending upon the domicile and how well put together the business plan is. So, there's amount of time spent in the early analytic. Some time spent in the implementation phase and all of that, generally speaking takes four to six months. That's generally what one would expect going into the cap.

Seth Madnick (15:32):
And that's a very pretty standard timeline, Bruce, on starting to say a single parent captive on that. And also if somebody or a group of business owners want to start their own group captive similar timeline, they'd have to share data and do that. The quicker timeframe is if a client wants to walk into an existing group and there are existing groups in the agriculture space group captives, where there are captive, I would say managers, promoters with the right phrases, but they have group captives where an agriculture client can't just walk into. It's a lot like a standard insurance placement. You provide all data to that facility. They will give you a price and their collateral requirements for that. And that's very similar to just a standard placement so that you're not building anything or owning. It's a prepackaged set. You get the service providers, claims administration, the investment manager. That's a prepackaged set of services you're walking into, but it's basically similar to a standard placement. Much of the work that we do is in with clients who want to build and own and manage their own captive. And that it's a control issue versus capital, they have capital. They just like own and manage their own captive. And we have clients on captive and single niche focused and focused on specific segments in the industry.

Bruce Droz (16:53):
I want to thank you very much for spending some time with me talking about today. And we look forward to chatting with you again soon for all your listeners out there for more information, please go to .

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