Captives can be key for finding creative, nontraditional coverage

ORLANDO, Florida – Captives can play an integral role in companies’ deciding whether to buy insurance and offer creative solutions when traditional markets can’t provide cover, experts say.

Jason Flaxbeard, executive managing director at Brown & Brown Inc., said it is critical to identify and quantify an organization’s risks and structure insurance programs to align with its risk tolerance and appetite.

He was speaking during a panel discussion Thursday at the World Captive Forum, sponsored by Business Insurance.

Workers compensation and auto liability are the only risks for which companies truly need insurance, Mr. Flaxbeard said.

“The rest, in theory, you could not buy at all and wend your merry way through life, but then the risk appetite kicks in, and you say, ‘If I have to divert funding from a specific project to this cat event, or whatever it might be, how does that affect my stock price? How does it affect my free cash flow? How does it affect my debt-to-equity ratio?’” he said.

Viewing it through that lens “kicks out a lot of risks, but it also leaves a lot in,” he said. When a company gets to that point, it has to decide which risks should be transferred and which it wants to place in a captive, he said.

Buying insurance allows companies to transfer risk, so they are protected in the event of a significant unexpected loss, said Jim Bulkowski, Americas captive insurance services co-leader at Ernst & Young. They buy it for liquidity, he said.

“You don’t want to take on this big balance-sheet risk, you want to transfer it,” Mr. Bulkowski said. Companies also buy insurance to meet regulatory mandates, such as in workers compensation, and to comply with contractual agreements to maintain insurance coverage, he said.

Captives enable companies to optimize coverages, reduce costs, and restructure their programs, to make things more efficient, said Jenn Allen, director, insurance and risk solutions, at IFO Group LLC, based in Detroit.

“I want to know, can I cover this myself? Can I structure this in a way where I don’t have to buy insurance,” Ms. Allen said.

In 2020, IFO Group established Tenda, which comprises two captive entities: a Cayman Islands-domiciled segregated portfolio company and a Michigan-domiciled, single-parent captive, Ms. Allen said.

“The primary reason that any discussion around captives at all began at IFO is because it was having issues finding quality health care (coverage) for family members,” she said.

The Cayman Islands entity covers third-party, health and life insurance risks. The Michigan captive was established primarily for tax efficiencies and covers some gaming risks, she said.

“Every time we go through a renewal, we are benchmarking and testing the market to see if we need to change structures on any of the policies to incorporate our captive,” she said.