Why Some Transportation Risks Could Find Options With Captives: Risky Future Webinar

Standard market woes, captive growth, and the increased importance of navigating relationships with third-party administrators–insurance experts in the commercial trucking arena have helped their clients traverse a challenging road in recent years.

Earlier this month, a panel of transportation insurance experts dissected these issues and more during an Insurance Journal webinar.

Kenny Planeta, the senior vice president and transportation practice leader at Heffernan Insurance Brokers, explained that 5-10% premium increases in the standard market are considered wins for trucking clients.

Flat renewals and decreases are “unheard of,” Planeta said, pointing to carrier losses in the commercial trucking line.

“The good performers are kind of subsidizing the bad performers,” he said. “Everybody’s heard the term ‘nuclear verdicts.’ I think the biggest impact we see on trucking companies is not necessarily fleets that are getting hit with that nuclear verdict — it’s the fear of that big verdict and not wanting anything to go to trial.”

Planeta continued: “Darn near any loss does not go to trial anymore. Everything gets settled outside of court, goes to mediation, and these settlements just keep growing. These attorneys rack up these bills, and in turn, it causes the premiums to go up.”

Cheri McGonagill-Spann, national sales and account manager for transportation and cargo at claims management and outsourcing provider Crawford and Company, echoed Planeta’s comments. She said claims have increased and that “nuclear verdicts are especially troublesome” in commercial transportation.

“Companies are increasingly frustrated with the traditional landscape,” said David Hoag, AVP and business development manager at Crawford. Hoag said the hard insurance market makes it a “difficult market to place business sometimes.”

“The value added for [companies] in a captive is they have more control,” he added.

Garrett Yates, vice president at Heffernan, said a knowledge gap exists between insurance agencies and the captive insurance arena.

Member-owned captive insurance programs are designed to give companies more control over premiums. Successful captive managers communicate with members and assemble teams of CPAs to handle finances and work with third-party administrators, reinsurers, loss control, and brokers.

The product is essentially an insurance company; the key difference is that trucking companies have “a lot more skin in the game” than they would with a traditional insurance policy, Planeta said. Transparency, accountability, and predictability are also increased.

Upfront costs notwithstanding, costs are lower, Hoag explained, and captives can be designed to fit a business model or need.

“Obviously, there is an initial cost, and that varies depending upon what the risk is and what have you,” Hoag said, later adding that the positive results of that are “that you’re forming a captive, designing it, and you can control your costs as long as you have that dedicated team working that captive on a daily basis.”

Structural elements of captives like claim-funding models and collateralization vary. TPAs like Crawford play a key role in handling and administering claims. In some cases, insurance companies serving as reinsurance for the captive will handle claims with their claims team.

“That model can be really good if it’s a good partner on the claims handling with the reinsurance,” Planeta said. “But a lot of the member-owned group captives have gone to kind of like an à la carte type situation — and the reason why you would want to split those up potentially is because the members get to look at it and say, ‘Are we happy with the claims handling that we’re getting? Is this TPA doing a good job getting on top of these claims [and] keeping us informed?'”

Heffernan has worked with multiple captives who have fired multiple TPAs because members don’t believe they’re doing a good job and voted them out. Similarly, Planeta explained they’ve also seen insurance companies lose reinsurance and claims handling responsibilities.

Hoag added that while group captives are a fit for more businesses, when it comes to a single captive, “that’s something for a Fortune 500 company. That’s a high consideration for a Fortune 500 company.”

In a nutshell, joining a captive makes sense for trucking clients who believe they are performing better than their peers claim-wise and still see their premium increasing annually, Planeta explained.

“In a group captive — you’re individually underwritten,” he said. “You know when your insurance premium is going to go up because your five years [of] loss history is worse than it was when you joined the group.”

From a high-level perspective, Planeta said that trucking companies need to have their house in order, from a safety standpoint, “because you’re going to be taking on more risk. You’re no longer transferring it all to the insurance company.”

Those who don’t are gambling and won’t win, he added. Most member-owned group captives have entry barriers like safety scores and claims history. Planeta said the captives that Heffernan works with make requirements and collateral entry and exit timelines clear.

A decade or so ago, businesses would talk about group captives and large deductibles when their fleets had 50 trucks. That’s how many it would take for premiums to hit $250,000, Planeta explained, but as premium dollars have increased, that starting point now looks like a 25-unit fleet.

And if they have their risk management and safety in order and have a predictable, good claims history, “now it makes sense for them,” he continued. “And 10 years ago, when they were paying $100,000 for 25 trucks, they just weren’t large enough to have it make sense.”

Heffernan has watched most of the trucking captives the brokerage has worked with double in size in the last five years. They continue to spin off new groups, Planeta said, because the market is there.

Plucking the best risks in the market and formulating and creating a rating structure based on individual performance present “a tremendous opportunity for a lot of companies,” Yates said.

“There’s a couple of major players in the captive arena,” Yates shared later. “The new captives that do continue to pop up are still within the same captive managers, which I think is really important, because you’ve got the history, the longevity, [and] the performance.”

He also explained that some direct markets are seeing that there is money to be made in the captive arena, “because there are a lot of really good risks out there.”

His advice to clients: Pick experienced partners when choosing or building a captive that has a history of doing a good job. This is important not just from a captive, claims, and reinsurance management perspective but also for the money managers overseeing the captive’s investment fund.

“There’s a large amount of income for the clients that could be achieved through that process as well,” Yates said.

This webinar marked the first in a series leading into Insurance Journal’s Risky Future Summit on Nov. 4. Attendees of that online event will learn from risk managers with a proven track record in safeguarding companies and clients as they showcase the benefits of robust risk management and highlight the consequences of oversight. Visit RiskyFuture.com to learn more and save your seat.

To watch a recording of the transportation panel discussion outlined in this story, visit the Insurance Journal Research and Trends website.