Strengthening construction market gives way to captive rebellion

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In a historically challenging construction market, medium to large companies looking for alternatives to traditional insurance may turn to captives to find stable prices and greater capacity.

Captives, licensed insurers owned by their policyholders, are attractive to construction companies that have invested heavily in risk management and want to contribute more to claims prevention and loss control. Captives also allow companies to combine multiple areas—typically workers’ compensation, auto liability, and general liability insurance—into one program.

Construction is seeing an increase in auto liability and general liability rates, driven in part by inflationary pressures, which is bringing uncertainty to the market as a whole. Companies that turn to the captive model tend to find better pricing predictability. According to Mark Totolos, senior vice president of insurance and programs at Skyward Specialty, they are valued by loss history versus risk and are not penalized by the unpredictability of the claims the guarantee market makes against insurers that are not aligned.

“In a captive model, members are selected on the basis that they all run the same high-quality operations and essentially become their own insurance company,” Totolos said. ”

Group captives tend to be the most common form of captives for mid-sized construction companies. In a captive group, the business becomes the owner of the sole shareholder of the insurance company by pooling its premiums along with other third parties. In homogeneous groups, the captives belong to the same industry, while in heterogeneous groups, the captives belong to different industries.

Group captives tend to focus on workers’ compensation, auto-responsibility, and shared liability. The ability to combine separate lines into one program is a big advantage for businesses.

“If they went into the traditional insurance market, they would have to charge separate rates for each of those lines,” says Don Histand, head of the captives group in Zurich, North America. “With a captive structure, they have the ability to bundle their insurance program into one solution, which can streamline the process.”

Joining a captive group

For businesses interested in joining a captive group, they need to find a broker or agent with experience and partnerships that can guide the potential customer to the right captive solution.

Often, members of an existing capture team may turn to other companies they have worked with, which they know are also best in class, to recruit them into the capture.

To form a new group of captives, the consultant will work with the brokerage community to educate them about the type of captives being created, Khistand said.

The broker will bring in clients for consideration in this new captive and the captive advisor will consider several entry factors including the client’s risk profile and see if it is a good fit.

According to Hystand, the founding members of the captive group are looking to a leading carrier/reinsurer such as Zurich for help in bringing in the various service providers needed to service the new captive.

According to Adam Migolic, Senior Captive Advisor at Hylant, the collateral and capital requirements for starting a captive group sometimes make a captive more expensive in its first year than if the business had stayed in a low franchise or guaranteed cost program. Migolic hosted a workshop on construction captives at the IRMI Construction Risks Conference in Las Vegas, Nevada, in November.

“Some people think, ‘Oh, this will cut my costs.’ It will if you give him time,” Migolic said. “Maybe on the first day, but if it doesn’t, it doesn’t mean it’s not financially viable for your company.”

In group captivity, participating participants expect to pay for fewer serious claims than they would be exposed to the market as a whole. Businesses must demonstrate excellent risk management strategies in order to be accepted into the group, thereby reducing the likelihood of serious claims.

Claims management

Even in the presence of best practices, claims inevitably arise between group members,

Construction is seeing a trend towards higher auto liability claims, fueled by rising medical bills and general inflation. Distracted driving continues to heavily influence commercial vehicles.

One of the ways in which operators work with group captives is that it allocates a portion of members’ insurance premiums to provide risk management services.

Zurich Resilience Solutions sends a construction risk engineer to evaluate their practices and see how employees work and how their fleet is operated, as well as what telematics or video cameras they use in their fleet.

Adriana Scherzinger, head of sales and execution for captives in Zurich, North America, recalled that the insured steel maker was accumulating losses in warehouses in yards across several states, prompting Zurich risk engineers to visit the site and identify necessary improvements from delivery to storage and retrieval. . practices. The engineering team found that the steel was stacked too high, creating instability.

Zurich helped the company improve its storage processes and encouraged them to maintain consistent inventory levels through cost-effective “lot purchases”, which satisfied their WIP needs.

“To improve worker safety, our risk teams also recommended increased supervision of new hires with less than 30 days of service, relocation of equipment to better protect crews, reduce heat stress, and ensure adequate drinking for workers during the summer,” Scherzinger said. “The new way of working has been implemented for all storage areas.”

Skyward Specialty offers loss control resources to clients to maximize their risk management strategies through the development of best practices and safer operations for employees.

“Insurers joining the group take risk seriously and want to structure their risk with others who agree with their ideas,” said Rick Childs, senior vice president of construction and oil and gas at Skyward Specialty.

The group’s captives are also interested in lowering the cost of claims for the potential return on investment they will receive.

“If the construction company and other members of the captive group perform well and can manage their losses within the saved limit over time, they will see the return on investment come back to them, just like a regular insurance company,” Khistand said. “They put that money back into their treasury and at some point in time, usually after six or seven years, they pay out the money, which is basically a return on some of the band members’ investment.”

Lone Captives

Many large construction companies use single parent captives (SPCs) as an alternative risk structure when the company insures itself.

Scherzinger said SPCs are being used to increase the value, capability, control and coverage of enterprise risk programs, especially in a tightening insurance market.

Building SPCs allow a business to combine multiple areas such as property, cybersecurity, workers’ compensation, construction defects and rework, product warranty, and general liability into one program.

Reducing the total cost of risk is the primary goal of any captive, followed by capacity, according to Scherzinger. SPCs provide an opportunity to hold more risk if market capacity is insufficient.

SPCs give businesses control over their claims and retention by allowing them to design and structure their own program. Businesses can also draw up their own policy forms.

Another advantage of SPCs is that they allow companies to write third party orders for subcontractors.

Like group grabbers, SPCs give businesses control over their underwriting profits. If there are limited claims, the funds are returned to the parent company or can be used to cover other risks.

“Each construction company must assess its risk profile and loss history to determine the proper balance of captive insurance financing and risk transfer,” Scherzinger said.

Topics Trends Prices Trends Construction

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