Captives, A Viable Risk Transfer Option
From: August 2006 Directions newsletter

PMA captive operations combine ease-of-entry with exceptional service, asset protection, greater decision-making power and the opportunity to participate in the associated underwriting profit and derived investment income.

Insuring your business is about finding the right type of insurance program to maximize your coverage and bolster your bottom line with services that speak directly to your needs. That's why alternatives to traditional insurance programs exist. The PMA Insurance Group offers a full range of alternative risk transfer product choices, including captives, for clients who want to take the next step on the continuum of risk-financing options.

At first glance, captives can appear intricate, complex and difficult to negotiate - but they certainly don't have to be. The PMA Insurance Group, with over 15 years of experience writing captives, makes it simple for clients to conduct captive arrangements. In this issue of Directions, learn more about captive arrangements, the services that come with a PMA captive, and which market conditions are ripe for captive formation. Also in this issue, read how a PMA-carried rent-a-captive arrangement is helping Goodwill Industries to reduce costs and take more control of how its insurance works.

HOW CAPTIVES OPERATE

Captives are established insurance products that take risk on the primary losses of the businesses that own or belong to the captive. PMA has been structuring both client-owned captive and rent-a-captive arrangements for over 15 years.

Client-Owned Captives

Client-owned captives are controlled by their owners, who are the principal beneficiaries, and operate much like traditional insurance companies. Captives pay losses, perform actuarial reviews and potentially derive underwriting profits and earn investment income on the funds held to pay claims. In most cases, the owners actively participate in decisions influencing the underwriting, operations and investments that drive their insurance coverage.

Rent-a-Captives

Rent-a-captives are facilities for clients too small to structure their own single parent captive. They, in essence, "rent" the surplus of another company by paying a fee. The rent-a-captive insures the risks of its renters and returns potential underwriting profit and investment income to them. Claims are handled by a third-party administrator (TPA). Rent-a-captives are operated as income-producing ventures for the companies or "renters" who participate for insurance coverage.

PMA provides coverage in captive arrangements for workers' compensation, general liability and commercial auto liability lines of insurance. Our captive unit is part of PMA Risk Management Services (RMS), our business segment that addresses the risk management needs of larger accounts with specialized insurance needs. RMS works collaboratively with clients to help balance loss costs with increased risk assumption in order to improve their asset protection and financial stability.

Currently, PMA manages written premium for captives insuring a diverse risk appetite that includes restaurants, non-profits, colleges/universities and more.

A Captive Market

The insurance industry operates in a cyclical nature, which is largely dictated by economic conditions. Typically, soft conditions enable employers to transfer risk at lower costs. When the market is hard, insurance is generally more difficult to obtain and comes at a higher price.

So which is the more conducive market for forming a captive?

Business owners and brokers have often wondered at what point in the cycle they should consider captive arrangements. "Something will cause the market to fluctuate," says Jeff Packard, PMA Captive Manager. "Whether it's another year of hurricanes or a tumble in the stock market, something will affect capacity. And when that happens, the more pressing question shifts to how prepared you are to handle it."

The proven adage of saving for a rainy day is good advice when it comes to captives. "When capacity is available and reinsurance pricing is reasonable, the timing is optimal for developing captive programs," adds Packard. Forming a captive in a soft market enables members to build leverage more quickly, something that usually takes years to develop. By the time the market begins to harden, it is too late. When companies struggle with new strategies to regain profitability, reinsurance pricing is already on its way up along with primary line premiums. As the market makes its shift, insurers often enter into re-underwriting periods during which certain classes of business and certain coverages become unavailable. Rate adequacy strategies also begin changing throughout the industry; the end result of which is often higher rates for exposures. Ultimately, this downturn toward a hard market is an adverse time to develop a captive or acquire specific and aggregate reinsurance to protect assets against loss. Once the soft market has passed, the optimal opportunity to enter into a captive arrangement has gone with it.

For complete information regarding PMA captive arrangements, contact Jeff Packard, Captive Manager, Risk Management Services, at 1-800-222-2749, ext. 5280, or via e-mail at jeff_packard@pmagroup.com, or Janice Marsh, Sr. Underwriting Specialist, at ext. 5277, or via e-mail at janice_marsh@pmagroup.com.

Fast Facts on PMA and our Captive Capabilities

• We are rated "A-" (Excellent) by A.M. Best

• PMAIC* is licensed in all 50 states, the District of Columbia and Puerto Rico

• We provide coverage in captives for the following lines of business: workers' compensation, general liability and commercial auto liability

• We offer superior claims and risk control services

• PMA is a seasoned captive provider, writing captives for over 15 years

• Domiciles in Bermuda and the Cayman Islands

• PMAIC is The PMA Insurance Group's lead insurance company, Pennsylvania Manufacturer's Association Insurance Company.

ADVANTAGES
There are several advantages to forming captive arrangements over selecting more traditional insurance programs. While both options will afford you quality coverage and service, here are a few of the benefits unique to captives:

• Reduced impact of market fluctuations within the traditional insurance system relative to pricing, coverage and capacity

• A need for increased capacity and flexibility to afford coverage

• Increased control and influence over financial risk and total insurance program cost

• Increased capacity to determine terms and conditions for coverage

• Direct access to reinsurance markets

• Potential to share in any underwriting profit and investment income

• Ability to control claims utilizing third-party administration

PMA Captive Classes of Business

While captives aren't for every business, PMA's risk appetite for captives is varied and diverse. Recent written captives include the following classes of business:

• Restaurants and Quick-Service Chains

• Contractors and Construction

• Colleges/Universities

• Non-Profit Organizations

• Hospitals/Nursing Homes (workers' compensation only)

• Manufacturing

• Retail/Wholesale Operations

Captive Support Services

PMA provides a single access point during the formation process of captive arrangements and offers expert claims, risk control, financial responsibility and reinsurance support to help keep the captive operating smoothly and productively. PMA service teams are local to clients and work collaboratively to provide full-service insurance solutions that ensure all of your insurance needs are met:

• Managed Care Services

• Risk Control

• Risk Management Information Systems

• Actuarial

• Finance

• Reinsurance

• Legal Contracts

• Underwriting

• Policy Administration

• Claims Services (including investigation, quality assurance, litigation management and three-point contact)

• Captive Management (including investing funds and cash flow accounting)
   

For complete information regarding PMA captive arrangements, contact Jeff Packard, Captive Manager, Risk Management Services at 1-800-222-2749 ext. 5280 or Janice Marsh, Sr. Underwriting Specialist at ext. 5277.