Candid Care: Captive Conversations

Candid Care Ep 14: Captive Conversations

Welcome to Candid Care, brought to you by M3. I’m Sarah Kekula, M3’s Director Of Senior Living And Social Services practice, along with Talia Fletcher, Risk Manager at M3. Each episode of Candid Care promises to challenge your current thinking about the long-term care industry and introduce concepts to improve your organization and advance the field from executive risks to key strategies. We’ll approach each topic from multiple angles and invite leaders with unique perspectives to join in the conversation.

Please be advised this podcast and the recommendations throughout are not intended as legal advice and should not be used as or relied upon as legal advice. This podcast is for general informational purposes only.

00:46 Sara Kekula

Today, of course, we’ve got on the docket a very interesting conversation about property and casualty captives. In essence, let’s simplify maybe a complex topic. And of course, we’ve got Brendan Bush joining us today, so we’re going to talk a little bit more about his role at M3.

Of course, a peer and colleague of mine, but help us understand Brendan, in your role as the Director of Property and Casualty Captives at M3. First, let’s define what a captive is. From your lens, what is it, what does that mean to our providers, the organizations that we work with? Why have they maybe heard that word? Define what that is, let’s start there.

01:27 Brendan Bush

Sure. So from a really big picture, a captive, it’s super simple. It’s an insurance company founded by a parent company or group of companies to help ensure their own risk.

01:40 Sara Kekula

I’m like I’m. I’m shocked that you actually simplified it that much, I thought there was going to be more to it.

01:43 Brendan Bush

That’s as simple as it gets.

01:45 Sara Kekula

So in essence, it’s an alternative risk financing model different than the quote -un-quote traditional insurance model that many are used to in this space. Can we kind of peel back the onion a little bit more, talk to me a little bit about how it is different than the traditional insurance model. What are some of the nuances behind a captive?

02:07 Brendan Bush

Sure. So for the vast majority of middle market or smaller market companies, they’re passing off all their risk to a insurance carrier, so for a premium, typically on an annual basis, they are getting a coverage form.

And regardless of their loss experience during that policy term, typically a year, they will not be paying any more or any less for that insurance product, regardless of what their losses look like.

So one of the differences with owning your own insurance company is, like you do today, you’ll also be paying a premium and funding your own insurance company. But the difference is by putting some skin in the game and owning the insurance company, you get to then take advantage of any underwriting profits.

02:59 Sara Kekula

Alright, well, this can sound appealing too. I’m thinking of so many that I work with and they think, hey, why can’t I have skin in the game? Tell me more, how do I get there?

Here’s what I know to be true, I think, captives, I mean, you said it yourself before we started this conversation. And I’m just going to rephrase it. I mean, you said something to the effect of: “A captive is not a solution for a difficult renewal, it’s a long-term solution for an organization”, right? Did I get that right?

03:29 Brendan Bush

Yep, yep. Captive should not be a knee jerk reaction. I don’t like the renewal that was put in front of me. Year they are a long-term business strategy. So I would view it as, you know, at minimum a 5-year kind of horizon and even beyond.

So when groups go into captives, you got to think of it as you are now either owning your own insurance company or joining a group of others to own your own insurance company. So instead of renting your vehicle, you’re now owning it.

04:01 Sara Kekula

And with that ownership comes additional responsibilities. For example, you know I’m thinking about risk management. Are the expectations tied to risk management? Metrics and performance that might be different for a captive versus that traditional insurance model. What does that look like?

04:18 Brendan Bush

Absolutely. So by having skin in the game and owning the insurance company, whether it’s your own insurance company and a single parent captive. But for the vast majority of groups in the middle market space, you’re going to be joining other companies. You’re going to want to have really strong risk control and measures to make sure that you’re reducing your risk.

And the peers that you’re owning your company with are going to want to see that out of their business partners. Because the profitability at the end of the day is tied to performance and so groups that go into captives, they’re going to have a lot of incentive to invest in safety, loss control in order to actually reap the rewards of owning the own insurance company.

And also isn’t all sunshine and rainbows by owning your own insurance company. You also have the potential to pay more than you otherwise would have had you stayed in the traditional market because you’re now again your own insurer. And if you go through the funding that you have set aside for that policy year, you might have to pay a little bit more than otherwise would have in the standard market.

05:26 Sara Kekula

Yeah, I’m. I’m a visual person and I’m thinking about continuum of risk kind of graph where you know, with that increased risk has the potential for increased reward. However, you know you’re also self-exposed in a different way, and that investment you’re making into risk management that’s also out of your own pocket, right, in addition to what you might be setting aside creating the insurance company and collateral,

Are there any other initial or ongoing cost that we, that organizations again providers serving you know healthcare in this healthcare space or serving the long term care community, what additional cost should they be aware of if they were interested in exploring this as an option.

06:09 Brendan Bush

O first, I think it’s important just to outline from the get go, there’s a lot of different kinds of captives. But for the vast majority of groups in the middle market and the healthcare or long-term care space, a group captive is going to make the most sense in which you as a company a business owner are joining a group of other companies and business owners, and operating your own insurance company.

In that instance, yes, there’s always going to be overhead expenses and operating your own insurance company. Anything that you can imagine, your traditional insurance company would have to do underwriting, reinsurance, claims professionals, taxes. You know all the things associated with operating insurance company, your insurance company’s also going to have to do as well.

 So those overhead expenses will have to be covered by the members of that captive insurance company, and like you do today, were those your insurance premiums for a third party insurance company, you’re essentially covering that as part of your premiums. You would be doing the same thing in a group captive. Your premiums would be some of them would be allocated to paying the overhead expenses.

There’s also a couple other kind of initial expenses associated with operating your own insurance company again, for most group captive insurance companies, you’re going have to buy a seat on the board, your share in the company. Typically that’s a one-time expense. Most group captives in the middle market, space that could be anywhere between $25,000 to $50,000 to own a share of the company. So that’s an expense that you would have to put down if you left the captive at some point in the future, you would get that back.

But also, since you’re in the now in the business of ensuring your own risk, there is also a collateral requirement where you’ll have to put down a certain amount of collateral to make sure that you’re not a flight risk. For instance, if you join the captive had a challenging year and ran up a big tab and decided to exit. That collateral is intended to make sure that if you didn’t pay good on what you owe to the captive, they could, you know, take advantage of that collateral.

08:24 Sara Kekula

That’s helpful, and I’m just kind of thinking the captive makeup too, maybe some myths to debunk. You know, my understanding is that you can have both a homogeneous or a heterogeneous captive. So made-up of different types of organizations in different industry protocols versus captive, where we’re all in the same industry verticals. Is that correct?

08:46 Brendan Bush

Yeah. So, there’s different versions out there and you got the terminology exactly right. Kudos to you, Sara.

Homogeneous capital is exactly right, are captives that are made-up of companies in the same vertical. So there’s captives out there that are dedicated to construction, captives out there that are dedicated to transportation, captives out there that are dedicated to healthcare or senior living, long term care.

So, and there’s also captives out there that, like you said, are heterogeneous, which are made-up of all different types of industries. Where you could have a long term care provider, a trucker and a street and road contractor.

There’s pros and cons to both. But traditionally, I’ve always encouraged folks to consider the homogeneous captives for some of the ancillary benefits that you might get associated with not only funding the risk together, but now joining a peer group of other people from your industry across the country that can help each other from a best practices standpoint. And just overall, making your general businesses better beyond just risk clients.

09:57 Sara Kekula

That’s super helpful and I think one of the things that I know to be true to so also maybe another message debunk is that in the past there was maybe an assumption that a captive model only existed for the big, big, large, large, large organizations.

And I think, I mean, I’ve heard you say multiple times kind of mid-sized and dare I even say kind of smaller groups depending upon you know, in essence, their capital. It could be the right fit. It really goes back to what is an organizations risk appetite and risk tolerance and does it align with their long-term strategy to consider a captive model.

Is there anything you think I haven’t asked you that you think this is so important for? Again, providers serving in an aging population or individuals with disabilities, etc,  what do you want to make sure that they hear?

10:45 Brendan Bush

Yeah, I think it’s really important to know what lines of insurance are a good fit for a captive, because we all have seen and I’m sure many long term care and senior living providers especially that have you know frame buildings property has been a very challenging market, so we’re all looking for solutions to the property problem.

In general, captives for middle market or smaller market companies are not a solution for property. Though they can be a solution for property schedules, when you start talking about really, really large portfolios and typically that that number begins with a “B” in total insured value. So for most groups, captives will not be a solution for property and we can get into the details into why in a different podcast about why property’s not a good fit.

But generally speaking, there’s three lines of insurance that are a good fit for captive and it’s workers compensation, general liability and auto. That’s where, you know, we want to make sure that if folks in the middle market space are considering captives, that’s where the most opportunity can be found.

11:53 Sara Kekula

And I so appreciate that I think that’s such a good clarifying point comment as to what it could include. And for what it’s worth, I think you know if there is anything I would want again listeners to take away from this is–If you haven’t broached this conversation or topic with your chosen and trusted risk advisor, consider doing so because it’ll help you understand as to why it may make sense for you today or maybe doesn’t. But I think it’s important that you, you know, again listeners are aware as to the different options that are available to them in the market.

Because it’s not just the traditional insurance anymore, is it? It’s fun stuff.

12:30 Brendan Bush

I love it.

12:30 Sara Kekula

Well, you have to love it. You’re literally the director of your property casualty captives, but anyways, well thank Brendan for your conversation, we are grateful for you and sharing some time with us this afternoon. So thank you.

12:43 Brendan Bush

Yeah. Thanks for having me Sara.

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