SHIELDING INVESTMENT INCOME THROUGH LOSS CONTROL
As a result of the ongoing trend of increasing captive insurance formation during the past few years, many captive owners are managing captives that have substantial assets in their loss reserves. The following article written by Assurance Partners and published in the most recent issue of Inside Medical Liability helps to outline the impact that effective loss control services has on the asset accumulation within a captive insurance company.
Having operated legitimate captive insurance companies for the past few years, these owners understand the significant impact that paid claims can have on the future earning potential of the captive’s assets. Although the losses are not typically large enough to jeopardize the solvency of the captive, when uncontrolled, they have a negative impact on the loss reserves. As they can also compel the owner to postpone any plans to offer additional coverages (and put a serious dent in the long-term value of the captive, should the owner ever decide to liquidate or sell) the importance of efffective loss control services should not be overlooked by individuals considering captive ownership either.
With these facts and long-term vision in mind, the most successful captive insurance companies have begun to implement loss control services. As most captive owners are also owners of successful businesses, they are accustomed to having interactions with the loss control specialists provided by their traditional commercial insurance carriers. Just as in the guaranteed-cost marketplace, the captive’s loss control services provider’s main responsibility is to provide recommendations to the captive’s insureds that are specifically designed to decrease the frequency and severity of potential losses.
But this situation is different from the relationship between a business owner and traditional insurance carrier; here, the reward for successful integration of an effective loss control program into a captive’s risk management strategy belongs solely to the captive’s owner. The reduction or elimination of loss costs (deductibles, administrative costs, accelerated depreciation, etc.) directly benefits the owner’s insured business (or businesses), because these dollars are allowed to remain within the operating entities. As the captive’s insureds now represent a better risk, the captive experiences lower claims costs and a larger loss reserve.
The symbiotic relationship that is created provides the captive with significant advantages and opportunities that would otherwise not exist:
- The positive performance of the insureds creates a more stable loss reserve, so the captive can invest more aggressively than before.
- A stronger captive balance sheet makes it possible for the owner to write new/expanded coverages, transitioning more dollars away from the commercial marketplace and back to the captive owner’s interests.
- The integration and successful performance of loss control services into the captive as well as its insured interests is conducive to a favorable score from the insurance rating agencies (A.M. Best, Moody’s, etc.). These ratings let the captive write coverages that require “rated paper” (i.e., workers’ compensation), reduce or eliminate fronting costs, and pave the way for a better negotiating position in the reinsurance marketplace.
Loss control programs are essential
Because the execution of these performance-enhancing programs is not a core competency of a traditional captive manager/attorney, the inclusion of an effective loss control program into a captive arrangement is often overlooked. Then, what may have been an unintentional exclusion can lead to significant gaps in an enterprise risk management strategy and unnecessarily puts the reserves (and future earnings) of the captive at greater risk.
When a captive owner selects a captive manager, attorney, or actuary, they utilizes the appropriate measure of due diligence. Due diligence should also apply to the selection of loss control providers for the captive insurance company. Best practices show us that an effective captive loss control program addresses not only the risks of each written coverage line; it also supports the overall mission of the captive and parent company, by lowering the total cost of risk for both entities. Loss histories and claim trends should be analyzed by the captive loss control provider and reported to the captive insurance company shareholders, annually, at minimum. With this extent of program-performance monitoring, the captive’s managers can tailor their loss control programs to reflect any emerging risks and thereby protect the captive’s assets more effectively.
Each captive insurance company and its written coverages are unique; correspondingly, a loss control provider should design and provide programs unique to the specific coverages of each individual captive. Because the exposures addressed by each type of captive coverage are inherently different from the associated hazard, the loss control programs should be designed to address the particular perils in the insured’s organization, as they relate to the specific coverage. For instance, if a captive is writing a coverage to reimburse the insured for revenue lost due to a regulatory actions (stemming from the ACA, HIPAA, etc.) incident, a captive loss control provider might make recommendations that would involve mock regulatory audits. Because this implementation of a recommendation and a particular program would (most likely) not reduce the likelihood of loss linked with another coverage type (i.e. a coverage providing defense cost reimbursement, or workers’ compensation coverage) the captive’s loss control provider should offer guidance to reduce the likelihood of unrelated risks, through separate loss control programs for the captive.
Financial game changer
Integrating effective captive loss control services into the operations of a captive insurance company can be a financial game changer for business owners. When the owners of a captive insurance company make risk management and risk mitigation a higher priority, this shift in strategy can protect against unnecessary loss, and make possible a significantly greater opportunity for asset growth, through the investment of more of the captive’s assets.
Furthermore, as the captive insurance company increases its reserves, it can decrease its reliance on third-party commercial cover for core risks. This is especially important for captives owned by small medical groups or a single practitioner: a well-structured enterprise risk management and loss control strategy in a captive insurance company can save up to $600,000 per year in taxes, without the need to alter the risks involved or the specifics of the operations of the owner’s interests.
The successful integration of loss control services into a captive arrangement helps provide some assurance that the impact of developments that now, or in the near future, will negatively impact the bottom line of the captive as well as its insureds is reduced, or even eliminated. As captives are becoming increasingly sophisticated in their insurance programming and their approach to investments, it is equally important that they be aligned with service providers that understand the liability and the asset side of the balance sheet. Because the potential loss of investment income and, more dramatically, captive solvency are so important, a captive owner should do everything possible to reduce claims costs and boost investment growth before a loss occurs.
About Assurance Partners
As one of the largest providers of risk management services in the Midwest, we specialize in partnering with strategic advisors and their clients to help them guide them through the process of determining risks that are unique to their organizations. We then translate those risks into a legitimate insurance program allowing them to obtain the protection and financial benefits that are unavailable in the traditional insurance marketplace, all while strengthening the advisors’ value and providing their clients opportunities for significant wealth growth and asset protection.
About Inside Medical Liability
Inside Medical Liability is the quarterly publication of the Physicians Insurance Association of America (PIAA). PIAA is the insurance industry trade association that represents a full range of entities doing business in the medical professional liability (MPL) arena. PIAA members insure more than two-thirds of America's private practicing physicians as well as dentists, nurses and nurse practitioners, and other healthcare providers and provide indemnification and other services to more than one million healthcare professionals around the world. PIAA members also insure more than 2,000 hospitals. Learn more at www.piaa.us