Ben Marcus founded The Marcus Corporation in 1935 with the purchase of a single movie theater in Ripon. Today the company, headquartered in Milwaukee, employs 6,500 people and operates 668 screens at 54 Midwest theaters as well as a second division that includes 19 hotels, resorts and other properties in 10 states. 

The thriving firm is clearly no stranger to managing revenue and investments and controlling costs; even in a down economy, its net revenues increased by 6.3 percent.

But one cost its owners hadn’t been able to wrap their arms around was its liability insurance — until joining a captive.

“Since then, we’ve seen at least $100,000 in cost savings,” says Thomas Kissinger, Marcus vice president general counsel and secretary, who explains other businesses may realize higher savings since Marcus Corporation had been primarily self-insured prior to joining. “We’re paying less because we’re not subject to the market risks, and unlike a traditional insurance company, we earn investment income on our premiums.”

The story at Indianhead Foodservice Distributor Inc. of Eau Claire is very similar to that of The Marcus Corporation. “It was really about stabilizing the costs and the cyclical nature of premiums,” says Tom Gillett, president and CEO, about the decision to join a captive in 2008.

He says the food service distributor, which delivers 80 million pounds of product per month to more than 1,200 accounts in Wisconsin and Minnesota, has seen a substantial reduction in insurance costs, “[but] there is still more benefit to be had.”

The fact is companies that qualify for captive insurance can save money. “Companies going into a captive are going to save roughly 15 percent,” says Mike Wosick, a partner and certified risk manager with Alternative Risk Resources of Brookfield.

“They will be in a diversified, low-risk pool that will ultimately decrease their insurance costs,” says Kissinger. “It’s been really good for us. I’m surprised more businesses do not get into it.”

What is a captive?
There are many reasons why companies do not wade into the captive insurance pool. One may be that many managers simply do not understand what a captive is and how it functions.

Gillett admits he was unsure about how insurance worked and even less certain how captive insurance worked and operated in the food distribution market. “It kept appearing to us as if there was something that we didn’t know, a question we hadn’t asked and some due diligence we hadn’t done,” he says. “The most difficult part of the process was just understanding it.”

Alternative Risk Resources describes captive insurance as follows: “A captive is an independent insurance company owned and managed by its members. The captive insures the risks of its owner/members by covering the predictable losses and transferring away the catastrophic, unpredictable losses. Captives typically reduce upfront premium expenses and return underwriting profits and investment income to the owner/members.”

Two types of captive programs exist

• Homogeneous captives are comprised of companies within the same industry, such as contractors or trucking firms.
• Heterogeneous captives are made up of companies from a range of industries that might include manufacturing, distribution, service and retail.

Which one a business chooses is largely up to the individual business. Business owners should vet captives carefully to find the best fit for their company, because each captive is different varies in its financial arrangements. “You have to make sure the financial viability of the captive is good, and you have to make sure the risks within the member companies are relatively low,” Kissinger says. He explains the captive Marcus belongs to only accepts the highest 20 percent of companies having the lowest risk. “And our captive is not homogenous; it’s very diverse, which I think is very good,” he adds.

Who are they for?
There is also a choice between single-parent and group captives, adds Wosick. He explains single-parent captives work well for large, multinational companies, while group captives fit best in middle-market companies paying for workers compensation, general liability and automobile insurance. “Captives are for companies that pay anywhere from $100,000 up to $5 million for those three lines of coverage,” he says.
 
The company that benefits most from captive insurance is one with good loss performance, solid safety and loss control programs in place, and an excellent safety and loss control culture among employees, according to Sean Doyle, a partner providing sales and brokerage services for Alternative Risk Resources.

Why a captive?
The most common reasons companies seek out a captive are access and affordability,” explains Jonathan Schuster, a partner with Axley Brynelson LLP of Madison. In the 1990s, for example, hospitals and health care providers were hit with a number of significant claims, which impacted their ability to obtain insurance at affordable rates. In early 2000, another uptick in captive insurance occurred in the long-term care industry, when companies were hit by rate hikes or were refused coverage because of a lack of tort reform in their states.

“They looked for alternative arrangements, one of which was forming onshore and offshore captive companies,” Schuster says. “With those companies, they have a better risk profile than traditional insurance markets.”

He explains: “People tend to forget that insurance companies are for-profit entities. They are looking to make money on your money. One of the biggest lifebloods on your insurance policy is the investment dollars they gain off your premiums. Within a captive structure, companies create those benefits and efficiencies on their own.”

Captives also offer greater transparency than traditional insurance, adds Doyle. “Insurance, in general, has a lot of unknowns around it. Captives lift the hood from an insurance standpoint, because members know where every transactional dollar goes.” For instance, captive participants know how much brokers make, the amount of cash allocated toward safety programs, and the annual dollars spent on claims management.

When and where to begin?
The first step in joining a captive is an independent actuarial study, which some companies, such as Alternative Risk Resources, do simply for giving captive insurance serious consideration.

Interested companies must provide data on all their losses, sales and payrolls for the last five years for the actuarial study, as well as information on their current insurance policy. The actuarial study helps determine the company’s premiums and initial investment.

They also must have a third party perform a risk assessment to ensure the company’s risks and safety culture match the captive itself. This assessment also identifies places where the company can improve and possibly reduce its premiums over time. Gillett says Indianhead’s risk assessment “identified areas where we could improve and even areas where we were lacking.”

Finally, a financial analysis investigates the company’s financial picture and determines its financial stability.

If all this passes muster, the existing members of the captive vote to allow the new member to join.

Once approved, Indianhead purchased stock within the captive, which Gillett said added up to approximately 10 percent of the annual premium, and placed money in a reserve to pay for claims. (This one-time capitalization fee is not subject to loss, earns investment income, and is returned to the corporation if it ever decides to exit the captive.)

“The amount you invest between the stock and the deposit is not insignificant,” Gillett adds. “But these funds are all invested and earn money on our behalf.”

And the how
“The idea initially for a lot of companies thinking about this is reducing their professional and general liability insurance premiums,” says Schuster. “But a risk program goes hand in hand with a captive program.”

The risk assessment identifies areas for improvement, but ultimately it’s up to the companies to improve. There is incentive to do so, however, because premiums are determined by the company’s five- to 10-year loss history.

“If we pay $100 in premium with traditional insurance, that’s our cost no matter what. If we have a bad year, we’ll see a premium increase the next year, but we’ll see nothing if we have a good year,” says Gillett. “In the captive world, if we pay $100 and we control our claims and control our losses and only $50 of that goes into claims, we’ll get some of that money back.”

Doyle adds that “the more culturally safe a corporation is, the better it is able to control its losses. If you can control the environment from a standpoint of safety and loss control in the workplace, it breeds better loss performance within the corporation. If your losses continually get lower, your premiums continue to lower as well.”

Most captives require members to become actively engaged in safety and loss-reduction programs. Captives with Alternative Risk Resources require members to attend two board of director meetings where safety is discussed. They also offer three risk control workshops throughout the year where members can learn best practices from loss reduction and safety professionals.

With the guidance of the captive, Gillett says the company cultivated safety programs and a safety culture among workers that has helped Indianhead reduce its losses over time. “Traditional insurance carriers promote safety and offer safety support, but it’s anemic compared to what the captive offers,” he says.

He adds, “We have gone from a place where things were accidents to a place where we view incidents as preventable. Safety has become an accountability for the entire management team.” 

Ronnie Garrett owns Garrett & Co. Studios, a Fort Atkinson-based company specializing in photography, editorial and graphic design services.

Traditional vs. Captive
Traditional 
Insurance

• Acme Inc. is a manufacturer that pays $500,000 in workers’ compensation, liability and automobile insurance premiums.
• Over the past three years, Acme’s insurance company paid $125,000 a year on average claims.
• Acme paid $4 to the company for every $1 that was paid in claims. That is a cost of over 400 percent on Acme’s dollar.
• Profits go to the insurance company.

Captive 
Insurance

• Acme becomes an owner/member of a group captive insurance company and pays a small initial investment.
• Based on Acme’s $125,000 per year claim history, its annual premium as an owner/member in the captive program is $275,000.
• Acme is now paying $2.20 per $1 of claims paid, lowering the cost of insurance from 400 to 200 percent on Acme’s dollar.
• Profits and investment income from Acme’s premiums are returned to Acme, after operating expenses are paid.

    
Alternative Risk Resources, 
www.altriskresources.com

By Ronnie Garrett

Ronnie Garrett owns and operates Garrett & Co. Studios, a Fort Atkinson company providing editorial, photography and graphic design services.

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