JOHNSON LAMBERT

THE EVOLUTION OF AN INDUSTRY

The captive market has become increasingly dynamic in recent years. To explore the current market, Johnson Lambert partner Adam Dubuque interviewed three captive leaders: Samantha Jones and Sally Leyes of Cummins, and Steve Garwood of Educational & Institutional Insurance Administrators.

Adam Dubuque: How has your captive evolved since formation?

Samantha Jones and Sally Leyes: The Cummins captive, Dynamo, was formed in 2011. Since its inception it has expanded from three property and casualty lines to 10 different programs in 2020, including international employee benefits. Given the continuation of the hardening insurance market and the strength of risk management programs at Cummins we plan to further expand the utilization of Dynamo when the actuarial and economic aspects make sense.

Steve Garwood: Our captive was formed in 2002, with workers’ compensation coverage initially. In the past nearly 20 years as our surplus has grown, we have added more coverages including property, student health and accident, auto physical damage, educators’ legal liability, employee benefit stop loss, and auto liability.

One benefit of adding these varying coverages is that they have different liability tails which allows us to diversify in long-term and short-term investments, allowing us to take advantage of changes in the financial markets.

Dubuque: What should those considering, or in early formation stages of, a captive think about from the perspective of someone who has been involved in this space for many years?

Jones/Leyes: A captive is a long-term commitment. The organizations involved should be invested in the governance structure, and ensure the board of directors is established along with the right processes, that meet not only the requirements, but also leadership or owner expectations.

Another key to success is identifying strong partners who are subject matter experts to advise in areas of actuarial services, tax, legal, and audit. Finally, the most important advisor is the captive manager, who helps establish the key processes and governance but also helps you to maintain and mature the captive operations.

Garwood: A major consideration is to ensure adequate capital funding at formation and not to be too thinly capitalized or adhere too strictly to minimum capital requirements. Within weeks of our captive formation, we were presented with a large claim that would have stretched the minimum capital funding that we originally contemplated. Instead, our captive formation committee and board recommended an initial capital that was four times the minimum that was required.

“The most important advisor is the captive manager.” SAMANTHA JONES, CUMMINS
“By utilizing technology, risk management teams can focus on providing value.” SALLY LEYES, CUMMINS

Dubuque: How have you seen the sophistication of captive management services evolve?

Jones/Leyes: Captive management practices are becoming more proactive versus reactive in how they approach alternative risk techniques. Instead of waiting until new trends are widely known in the insurance industry, captive managers are coming to owners with observations, thoughts, or ideas on how to use their captive more sufficiently for addressing these trends.

Garwood: The services that captives owners originally sought such as accounting, state filings, assistance with annual audits, captive formation consultation, and actuarial services have evolved over time. In addition to these services, captive managers are now performing complex models which analyze combinability of coverages, representing their captives in disputes with non-domiciliary states, and informing clients of industry trends, for example.

Our non-insurance board members value their knowledge and opinions about the captive and the industry in general.

Dubuque: What technological advancements are you excited to see enhance a captive’s operations or general risk management?

Jones/Leyes: Data is one of the biggest challenges and the biggest opportunities for risk management departments. Risk management information systems require investment but provide a lot of opportunity to unlock value in many areas. Using the data to identify trends in claims or loss control opportunities are ways risk management and captives can demonstrate value.

There are possibilities for automation in actuarial analysis, claims reports, and data collection, which are often done manually. By utilizing technology, risk management teams can focus on providing value to the business operations and leadership.

Garwood: The ability of captive managers or managing general agents of captives to perform complex risk and financial modeling as coverages have evolved over time is very beneficial especially when new risk products are being created.

In addition, the evolution of claims databases allows for a more thorough picture of policyholder claims when it comes to analysis and risk management techniques.

“Having knowledgeable professionals at the ready is essential.” STEVE GARWOOD, EDUCATIONAL & INSTITUTIONAL INSURANCE ADMINISTRATORS
ADAM DUBUQUE, JOHNSON LAMBERT

Dubuque: How would you describe the value to a captive of working with specialist service providers?

Jones/Leyes: Good partners who are subject matter experts in various aspects of captive and insurance-specific management (actuarial, auditing, legal, tax, etc) are invaluable to a captive owner. Since a captive is essentially an insurance company, there are many compliance and regulatory items to follow. It isn’t realistic to expect the owner or management team to be individuals who are experts in all these categories. Finding partners that have captive industry experience and can match your organization’s values and strategy are a necessity to running a captive successfully.

Garwood: The captive insurance industry is unique and it justifies having professional service providers who specialize in this industry. From the unique terminology used to state and federal regulations and laws, and more, this industry requires specialists in multiple fields including legal, accounting and finance, investment, and auditing, for example. The learning curve can be steep so having knowledgeable professionals at the ready is essential.

With great insights from veteran captive professionals in mind and with the right team in place—both at your organization and through strategic partnerships with captive-focused service providers—if you are considering a captive solution, this market may offer a compelling opportunity to pursue it.

Should you need additional information or any guidance from an assurance or tax perspective, the Johnson Lambert team would be pleased to be a resource.

Samantha Jones is a senior captive analyst at Cummins.

Sally Leyes is managing director, Global Risk, at Cummins.

Steve Garwood is vice president, treasurer and CFO of Educational & Institutional Insurance Administrators.

Adam Dubuque is a partner at Johnson Lambert. He can be reached at: adubuque@johnsonlambert.com

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