VideoDirectory Distributing Associates Inc. (DDA) stopped paying through the nose for workers' compensation insurance in 1994. Fed up with expensive state assigned-risk pools, DDA rented a captive facility instead--and slashed its expenses by half. "The strategy has driven down our costs and provided more claims control," says Michael Shelton, CFO of the St. Louisbased order-fulfillment company, which currently has 60,000 employees. "I can finally budget the expense. In the past, I never knew what the next year would bring."
Renting risk transfer may seem off the wall, but it's a proven concept that has kicked around for more than three decades. With commercial property-and-casualty insurance prices up 5 to 10 percent this year and headed for further increases, many alternative risk- transfer strategies are being dusted off and reconsidered. Among them is the rent-a-captive.
Think of a rent-a-captive as a mall of stores, with each store representing the self-insurance program of a particular company. The concept is akin to that of a traditional captive--a subsidiary owned by a corporation to insure its own exposures. The difference is that with a rent-a-captive, the corporation doesn't have to go through all the hoopla of incorporating the captive; it leases one instead.
"A company doesn't have to come up with the initial capitalization and endure the regulatory legwork to create and fund its own captive, since we've already done that for it," says David Alexander, president of Mutual Indemnity Bermuda Ltd., a Hamilton, Bermuda-based rent-a- captive that represents the insurance interests of 155 active clients.
Rent-a-captives promise pretty much what most corporate-owned captives offer: more control over losses through improved claims management, the ability to garner underwriting profit and investment income on the funds set aside in the facility, and even potential tax benefits. What's different is that the company avoids the usual accounting and auditing issues, which are handled by the rent-a-captive sponsor.
What do sponsors get for providing capital and administrative services? Most charge a percentage of the premium paid to them; some take a share of the investment profit.
Rent-a-captives have evolved considerably since their debut in the 1970s. Early programs involved the sharing of risk among the individual renters, which was great if your company had a high-loss year, but less great if you had a low one. In recent years, as the competition among rent-a-captive domiciles has intensified, new structures have been unveiled that wall off each company "cell" (the preferred nomenclature for a corporate account) from the loss experience of other cells.
In Bermuda, the seedbed of the captive movement, segregating cells had been legal but difficult, requiring a private act of Parliament. New legislation enacted in 2000 (The Segregated Accounts Companies Act) makes this a walk in the park today, requiring only a simple application process. This has dramatically increased interest in rent-a- captives.
So has, of course, the tightening insurance market. "Applications are up tremendously, and we're executing quite a few deals," reports Alexander. In the fourth quarter of 2000, Mutual wrote 16 new corporate accounts, compared with 5 in the same quarter of 1999.
Both offshore and onshore domiciles support the novel insurance facilities, including Bermuda, Gibraltar, Guernsey, the Cayman Islands, and several states. Altogether, about 1,000 companies are said to be leasing a captive (Mutual's various rent-a-captives have more than 500 of these companies) at some 75 rent-a-captives in these domiciles.
ATLAS IN THE VANGUARD
Atlas Van Lines Inc., a national moving company based in Evansville, Indiana, was an early adherent to rent-a-captives. "We joined Mutual back in 1988 simply because we had to get affordable workers' compensation insurance for our truckers, which at the time wasn't available," says Howard E. Parker, CFO of Atlas, which has annual revenues of $550 million.
Parker says the rent-a-captive strategy has paid off nicely. "I'd estimate we've put an extra $1.2 million on the bottom line, pretax, each year since we joined," he says. "Had we started our own captive, we'd have had to train people to manage it, and put up a ton of capital just to incorporate it. I get the benefits of a captive without all the hassle."
Atlas establishes a premium based on its understanding of the risk, and charges that amount to the 1,100 independent truck owners-operators that have elected to buy workers' compensation insurance through its program. In between, however, are a number of complex transactions.
For example, for policy issuing and tax reasons, Atlas buys insurance from a so-called fronting insurance company. The fronting carrier (Milwaukee-based Legion Insurance Co.) is theoretically liable for the policy losses, although it cedes this risk entirely to IPC Cos., a Mutual subsidiary. "I collect the premium from the owners- operators, and pay a premium to Mutual that is less than that amount [providing a profit to Atlas], which in turn pays a premium to IPC Cos.," explains Parker. "IPC then assumes the entire risk from the fronting carrier."
Atlas covers the first $250,000 in per- claim losses, plus 10 percent of losses that exceed $350,000, up to $1 million. IPC buys reinsurance to cover the remaining 90 percent risk. Losses above $1 million also are covered by a separate reinsurance policy that IPC buys. To pay claims, Atlas draws from its rented captive's loss reserve fund, which is composed of the premium it has charged and collected, plus the accrued investment income.
Reader Comments» Post a comment