WASHINGTON — Some truths about risk insurance: Convenience stores and gas stations carry plenty of it, and premiums have gotten more and more expensive, especially since the COVID-19 pandemic began.
With this in mind, convenience retailers and insurance professionals met in Washington, D.C., Oct. 25 and 26 to discuss captive insurance as an option a less-expensive and more self-sufficient model of insuring a store or chain. About 30 retailers attended CSP’s first Captive Insurance Forum. Of the retailers in attendance, about a third already had their own captive-insurance subsidiary. The rest were there to learn more about captive insurance and find out if it was for them.
Key Questions
So what is captive insurance? A captive-insurance company is a wholly-owned subsidiary insurer formed by a retailer or other business to provide risk mitigation services for the parent company or related entities. It is formed, owned and controlled by the parent company it insures. Captive insurance is a form of self-insurance, but it is more formal than simply setting money aside.
There are two types of captive insurance:
- In a non-sponsored variation, the parent company is the creator and the beneficiary. Within that category the most common subtypes are single-parent or “pure,” group and association.
- The second category is sponsored, in which the captive program is owned and controlled by another company that allows other businesses to “rent” insurance.
The potential benefits of having a captive insurance company include lower insurance costs, tax advantages, underwriting profits and greater control of coverage. Captive insurance companies can be helpful when the commercial insurance market is unable or unwilling to provide coverage for certain risks. Drawbacks include overhead expenses, compliance issues, and the potential to be underinsured.
And why is captive insurance a topic of conversation now?
Insurance has been going through a “hard market,” according to Luke Foley, vice president of Graham Co., an insurance agency based in Philadelphia. A hard market is when premiums increase and capacity for most types of insurance decreases.
According to Foley, as of the second quarter of 2022, he has observed 19 consecutive quarters of increasing premiums. He also blames “social inflation” for a rise in the cost of many insurance settlements. Anyone can see and learn anything online, he said, and this reality has driven up insurance costs.
“A million dollars is just not what it used to be,” said Foley. He also said hard market conditions will likely continue into 2023, but that the issue is starting to improve.
Additionally, access to more robust data is making it easier for retailers and other businesses to properly assess their risk in-house and to move to captive insurance. As in-house data improves and social inflation rises, more insurers are recommending captive insurance as an option, according to Foley.
Building a Partner
While supporting efforts to adopt captive insurance, speakers at the forum were not shy about the amount of work that comes with running a captive insurance firm. “Crikey, there’s so much to do here. Why would anyone want to do a captive?” said Dr. Henri Winand, CEO and co-founder of London-based Akinova, an electronic marketplace for the transfer and trading of insurance risks.
One important upside to captive insurance is that it allows the insured company to choose its own legal representation, said Steve Burkhart, vice president and general counsel, Bic Corp., Shelton, Conn. “You’re going to have lawsuits. You’re going to have claims,” said Burkhart. And if that’s the case, he said, shouldn’t retailers choose their own lawyer?
With most insurance partners, the insurance company chooses the legal counsel that deals with claims and lawsuits, said Jonathan Bye, partner in legal firm Ballard Spahr, Philadelphia. “They’re known to have extremely low rates. They’re known to have huge caseloads,” he said, making them less than ideal to represent the interests of the insurance firm’s client.
Many times, insurance companies do not worry about the public relations ramifications when they decide how to handle an insurance claim, said Bye. The ability to choose legal counsel with captive insurance allows retailers to consider optics when making legal decisions, which could be important for retailers in today’s era of high inflation, especially at the fuel pump.
Captive insurance might provide more flexibility and control over coverage, but it does not guarantee anything, and even captives can deny coverage, said Bye. “Even though they are the captive, they are still a separate corporation,” he said, meaning they operate independently.
Captive insurance isn’t for everyone, cautioned Foley. It takes time for the investment that goes into starting a subsidiary insurance company to bear fruit, so the commitment might not make sense for a business that intends to sell in a few years.
“You’re not going to see returns from a captive in one year. It takes time,” said Foley. Family-run businesses or public companies often work well with captive insurance, Foley added.
Retailers left the Captive Insurance Forum with information and connections they needed to decide if being their own insurer is right for them.