The captive industry has grown and matured significantly from the original concept that Fred Reiss introduced more than 60 years ago. Originally, the concept was primarily directed to provide an alternative risk financing approach for Fortune 500 corporations. The approach is one that allows corporations to be able to retain a portion of their risks through the use of a wholly owned insurance company. However, as the captive movement has expanded, so too has the ownership aspect of the concept.
Today, much of the captive market is centered on middle market accounts. As a result, creative approaches such as group and association captives have begun to flourish, as have rent-a-captives and segregated cell captives where multiple owners are involved with the captive. Another type of captive that has been introduced since the original concept is the agency captive. Agency captives represent a significant departure from the more traditional captive model in that the agency involved is the one that has the “skin in the game.
” Since being introduced, agency captives have provided a viable alternative to traditional profit sharing for agents who wish to diversify their revenue stream or be better compensated for their niche expertise. Concept overview Several carriers have ventured in and out of the agency captive business over the past 10 or 12 years; however, one major carrier has made a long-term commitment to the agency risk-sharing business model. The carrier, Great American Insurance Group (GAIG), has been actively involved with this aspect of the captive marketplace since 1999 and currently has 24 agency captives.
Like the majority of Great American’s captive business, the agency captive business is housed in its Alternative Markets Division. In essence, GAIG’s Alternative Markets Division’s agency captive business is made up of two broad classifications: the program book and the generalist book. One of several unique features to GAIG’s captive business is that the division is a self-contained unit. It has its own leadership team, sales staff, underwriters and actuaries, as well as claims specialists.
This provides a significant advantage over other carriers that have to depend upon other departments for support services and decision-making authority. The majority of the GAIG Alternative Markets Division’s agency captive business is written on a generalist basis. According to Sarah Berger, CPCU, AIC, the divisional vice president of the Alternative Markets Division, Great American Insurance Group, this means “while you may be utilizing an alternative market or risk-sharing approach to the business, the products being sold are traditional ones—competitive in price, coverage and commissions with the standard commercial lines marketplace.
” While a generalist approach typically involves a single agency, there also may be a multi-agency arrangement as well. Berger notes, however, in either case, there is a degree of franchise value uncommon in today’s marketplace. Typically, this generalist type business is based on a standard BOP and/or middle market type product. But, the captive will be providing unique features not available in the open market. From an underwriting standpoint, when considering such business, says Jeff Henke, the divisional vice president of the Alternative Markets Division, Great American Insurance Group, “we always begin with profitability.
” Then they must design a product that is unique in the market, “in essence, find a ‘coverage hook’ that will provide for a more competitive product. ” He goes on to state, “These are not just cookie cutter programs that every carrier has. ” However, it is not just the profitability issue that is important, as Berger points out. “We are also concerned about the quality and reputation of the agents who will be marketing the product; the credibility of the agency within their community and throughout their market territory.
” Mark Thompson, production underwriting manager with the division, notes, “The generalist type programs represent interesting opportunities for us. From an underwriting perspective, we are really in the game with a lot of different markets. ” As a result, he says, “It is imperative that we enter a new relationship alongside the account management team, while continuing to provide individual underwriting as well. ” What this means, Thompson says, “is we have to be a very valued market. ” For the most part, “We need to become one of the agency’s top three underwriters and be viewed as their ‘go-to’ carrier.
” GAIG’s Alternative Markets Division believes that they can develop this business based on “underwriting instincts and coverage forms that will allow them to win business (either new business or renewal) for the agency. ” In addition, they also believe that if agency captives are designed properly, they can flourish in any part of the traditional market pricing cycle. Henke notes that, for the most part, the program business is built around a homogenous book of business that is designed for a specific niche.
Among some of the program accounts that utilize an agency captive is specialized coverage for retail wine and liquor merchants as well as commercial wineries, small to mid-sized technology companies and a program for rural telecommunications companies. When considering a program type account, Henke notes, one of the first points of consideration is to determine the profitability of the book, based on today’s price levels. From here, Henke indicates, “We would then follow our normal due diligence process. ” Berger states that it is important from the program side of the business that the agency is a known entity for this type of coverage.
“The agency must have tenure in the marketplace, and a high level of niche expertise,” she says. A long-term view of agency captives What is the appeal of a GAIG agency captive? This is a question that agencies of all sizes have begun to ask. According to Carol Frey, business development manager with the division, there are several key reasons for considering GA. “Agents like our model in part because of the franchise value we deliver; they like the fact they can bring something different to the table. They also value our operational discipline and the close relationship we build with each program.
” In an insurance market that has become so commoditized, where frequently the only factor that differentiates the carriers is price, GAIG’s agency captive participants believe that they are part of something that is truly unique, while still offering their clients quality products at a competitive price. One of the key aspects of the GAIG Alternative Markets Division’s due diligence process is the educational aspect. It is not just GAIG becoming familiar with the agency involved, but it is also about the agency learning more about GAIG’s approach to the captive business.
Berger points out, “We review all the pros and cons generally associated with an agency captive. ” In addition to discussing how to put these programs together, she says, “We also talk about how to get out of them and what is the best approach regarding an exit strategy, if one is needed. ” Agency captives are not for everyone. As Great American can tell you, they require a lot of planning and work to make them function properly. It is critical that the agency look at this as a long-term commitment. “We’re not interested in trying to do this for a year or two,” says Berger.
Further, she points out that key agency personnel must view the captive as part of the agency’s strategic plan. Thompson agrees, stating, “The agency must take action and cultivate the captive. ” And he adds, “You need sufficient business running through the captive to make it viable. ” From GAIG’s Alternative Markets Division’s experience for a generalist agency captive, this typically means drawing business from an overall agency book in excess of $10 million of commercial commission revenue, unless part of a multi-agency captive structure.
Conclusion Interest in agency captives has ebbed and flowed over the past 10 to 15 years; however, today, many agents are interested in learning how agency captives can fit into their long-term strategic plans. One of the carriers that has mastered the agency captive concept is Great American Insurance Group. According to Sarah Berger, there are several reasons for this: “franchise value, long-term partnership relationships, and financial incentives, all of which are designed to provide the agency with more control over their business.
” She goes on to note that if the agency desires to perform some of the services such as underwriting, claims or loss prevention, “the agency captive can provide a further diversification of revenue streams for their operation. ” At the end of the day, Berger says, “When an agent can work with a carrier to ‘deliberately’ build a book of business, they can produce a better financial return, than just receiving commissions. ” Jeff Henke also notes a similar theme: “There are risks with this but the offset is that you now have a potential revenue source that isn’t totally tied to commission.
” At this point in the insurance market cycle, there is little doubt that the pricing will be generally increasing and mid-sized agents need to determine how best to approach the market hardening. If you are looking for a carrier that is a recognized long-term partner, who has shared objectives and can respond in a timely fashion, you may be well served by considering Great American Insurance Group, which continues to seek profitable, long-term captive risk-sharing opportunities.