Risk Pooling and Customer Programs, Why When, How? T.J. Scherer – Account Executive, Artex Risk Solutions Matt Nesbett – Owner/Officer of Synergy Risk Group, Inc. Moderated by: Fay Okamoto, SVP, Artex Risk Solutions
Agenda • Background Pooling • Types of Pool Options and Techniques • AEX • Synergy Risk Background • Why a Pool • Why Customer Programs • Questions
Artex Background • In the Alternative Risk marketplace for 30+ years • Over 1,500 captive clients under management • 400 employees world-wide • Place over $1 billion of premium annually • Set up and manage 1400+ large and small single- parent captives • Manage a portfolio of 23 Industry-Specific and Mixed-Industry Group-Owned Captives
Various Pooling Mechanisms Enterprise Risk Medical Stop Loss Management Liability Workers Compensation Deductible (large) Deductible Reimbursement
Pooling Continued • Enterprise Risk Pool • Pools certain risks among a large number of clients. Example: litigation expense, general liability DIC, and administrative actions • Target Loss: low frequency, higher severity • Availability: typical middle market businesses have some common enterprise risks that can be pooled • Management Liability Pool (MLP) • Pools D&O, small Cyber, Fiduciary, small EPL, Small Crime, and Misc. Prof. • Target Client: Businesses not purchasing these in commercial market • Deductible Reimbursement Pool (DRP) • Pools various deductibles in property, management liability, GL, AL, and other. • Target Client: client with deductibles in commercial policies • Medical Stop Loss Pool • Pools a floating layer above a specific insured medical retention • Target Client: client with over 50 employees on a self-insured medical plan
AEX • AEX is a Workers Compensation (WC) pooling arrangement providing risk distribution, shifting, and sharing for clients on a high deductible WC Plan • It pools the $0-100,000 layer of WC • It is virtual and contractual which means that the reinsuring captive holds all of the premium and pays claims • There is no change to the commercial set up and coverage • Target Client: Over $600,000 of incurred WC losses annually
Typical WC Structure Excess Insurance (Commercial Carrier) Statutory Workers’ Comp $250,001 $250,000 Business or High Deductible Retained Layer Captive $0
Typical WC Structure Utilizing a Pool Excess Insurance (Commercial Carrier) Statutory Workers’ Comp $250,001 $250,000 Business or High Deductible Retained Layer Captive $100,001 $100,000 AEX Pooling $0
Pooling and cash flow example Business Captive A A Business Captive 2M 2M AEX B B Business Captive C C
Synergy Risk • Formed in 2017 • Covers employees in 5 closely held corporations representing 8,000 employees in 31 states • Historically insured through carriers under high deductible plan(s) • Tied up credit lines due to large Letters of Credit to carriers • Premiums lagged behind current loss runs by years • Claims management handled primarily by carrier • Reserve retention kept by carrier (approximately 55%) • Limited number of carriers willing to quote
Synergy Risk • Captive idea and research • Allows for composite premiums vs individual state premiums • Larger deductible limit allows Captive to retain risk vs. Carrier which resulted in lower letters of credit and premiums • Retention of reserves kept by Captive (Approx. 85%) • Retention is higher due to favorable results from our internal safety program which has lowered claims expense by 45-50% over last two years • Reserve retention would have been kept by the carriers under traditional insurance • Ability to invest reserves in the market • Gains from investments will be large enough to sustain all operating costs of the Captive after 1 year (using an avg. 5% return) • Reserve losses on balance sheet are now tax deductible (applicable to cash basis companies only)
Why Choose Workers Compensation? • Company is experiencing rapid growth through organic and M&A activity • Effects of Safety Program and Nurse Triage program have resulted in: • From 2013 to 2017 EMR ratings have declined from 1.0 to .72 (28 % decrease vs. 6% decrease in premiums) • Loss runs have declined from 3.2% of payroll to 1.8% of payroll (44% decrease vs. 6% decrease in premiums) • Carrier was benefiting from our safety program more than we were by retaining the cost reductions and only lowering premiums by 6%
Workers Compensation Loss Statistics 4.50% 1.20 4.00% 1.00 3.50% 3.00% 0.80 2.50% 0.60 2.00% 1.50% 0.40 1.00% 0.20 0.50% 0.00% - 2013 2014 2015 2016 2017 WC Premium % 4.25% 4.25% 4.25% 4.25% 4.00% Loss Run % Of Payroll 3.2% 3.0% 2.6% 2.1% 1.8% EMR 1.00 0.95 0.85 0.77 0.72
Workers Compensation Cost Analysis 6,000,000 4.50% 4.00% 5,000,000 3.50% 4,000,000 3.00% 2.50% 3,000,000 2.00% 2,000,000 1.50% 1.00% 1,000,000 0.50% - 0.00% 2013 2014 2015 2016 2017 WC Expense 3,519,408 3,164,278 3,499,450 4,454,000 5,280,000 Loss Runs 2,639,556 2,214,995 2,099,670 2,227,000 2,376,000 Retained By Captive 2,904,000 Retained By Carrier 879,852 949,283 1,399,780 2,227,000 WC% Per $1k Payroll 4.25% 4.25% 4.25% 4.25% 4.00% Net WC % of Payroll 4.25% 4.25% 4.25% 4.25% 1.80%
Why Pool? • Pools provide a source of unrelated risk • Unrelated risk allows for direct premiums focused on other business risk • Smoothing of losses • Benchmarking • Protection against catastrophic loss • Law of large numbers • Recent Developments…..
Which Pool? • Considerations • What Risks should or can be pooled • Deductibles • Size and predictability of annual losses • Specialized risks (Contractors, Agriculture, etc) • Premium spend • Risk tolerance
Policy/Premium Flow Pool Business Captive Direct Premiums Other type of insurance Prior year’s retained risk (any line) (GL, AL, ERC) Excess work comp layer (e.g. 150 x/s 100)
To Join or Not to Join • Typical Pro’s • Smoothing Cash Flow and Predictability • Recoup bad years through risk shifting and sharing • Meet IRS standards • Typical Concerns • Paying for others losses • Cost • Potentially restricted limits • Close out of periods and timing • Synergy’s Experience
Why Customer Programs • Examples • Tenant – Habitational, Self-storage • Warranty • Travel -- Car Rental, Hotel, Airline • Students • Captive Risk Diversification • Third-Party Business • Generally tend to be profitable • Better Control • Add Value to the overall customer experience • Reduce friction points in customer relationship • May not entail taking new risks: create a funding mechanism
Questions and Comments
Contact Information Matt Nesbett Executive Vice President & CFO (864) 297-3748 x-7395 https://www.ihservices.com/ mnesbett@ihservices.com T.J. Scherer, CPA Account Executive – North America Mailing: 1635 N. Greenfield Road, Suite 127 | Mesa, AZ 85205 USA o: 630.694.5480 | c: 319.530.7773 | f: 480.248.6444 www.artexrisk.com | tj_scherer@artexrisk.com Fay Okamoto Senior Vice President, Hawaii Captives 1357 Kapiolani Blvd, Ste 1430 | Honolulu HI 96814 o: 808.426.5906 | f: 808.426-5905 www.artexrisk.com | fay_okamoto@artexrisk.com
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