Tennessee Department of Commerce and Insurance
Mark Wiedeman, director of captive insurance at the Tennessee Department of Commerce & Insurance, discusses how Tennessee is emerging as a frontrunner in the rise of mid-market captives
What impact will the increasing adoption of mid-market captives have on the traditional insurance market landscape, especially for insurers specialising in coverage lines that mid-sized businesses are increasingly self-insuring through captives?
Several items continue to impact the premium pricing in traditional markets. Some examples include pandemic risk coverage, increasing cyber liability, rising costs in healthcare, and climate-related events.
These exposures have led to a persistent rise in traditional premiums and the exclusion or withdrawal of traditional carriers in specific areas such as property coverage.
As companies begin to navigate this landscape of limited or non-existent coverage and initiate self-insurance programmes through a captive mechanism, traditional markets will continue to see a decrease.
What specific regulatory considerations must be addressed to ensure sustainable growth of the mid-market captive segment in Tennessee while maintaining robust risk-based capital requirements?
As regulators, we strive to understand the evolving captive landscape and keep pace with industry trends while maintaining a stable regulatory environment.
Our foremost concern is the solvency and liquidity of captives.
Maintaining robust risk-based capital requirements where applicable is essential, and having a strong framework that allows captives to innovate while remaining in compliance with statutes is imperative to continue growth.
How can mid-sized businesses effectively address the challenge of achieving sufficient risk pooling and diversification to ensure captive viability, particularly in the initial formation stages?
Being able to distribute risk among a larger number of unrelated risks is important in risk pooling and diversification.
Participation in established, reputable risk pooling programmes and quota share reinsurance agreements can accomplish this.
How does the cost-effectiveness of captive formations vary across different industries, considering factors such as risk profiles and claims history?
Companies with low risk tolerance may not find captives to be an ideal solution. While the costs of establishing a captive programme are likely to be similar across industries, companies facing higher risks must find ways to mitigate and take ownership of controlling those risks. They are likely to have poor loss experiences and run the risk of retaining even more of their losses while spending more than they should have had they remained fully insured by a traditional carrier.
How does Tennessee leverage data analytics to equip mid-sized businesses with the information needed to conduct a data-driven feasibility analysis to determine if a captive is the appropriate risk management strategy for their specific needs?
Domiciles do not work with the insureds to determine whether a captive is feasible for their specific situation. Companies will undertake that analysis themselves or work with captive managers and other service providers to establish whether a captive would be a good option for them.
While we do not consult or provide information to potential captives or help them with determination of what programme is right. We can make suggestions to ensure the insureds are able to achieve their goals while maintaining compliance with statutes, rules, and regulations.
Beyond protected cell captives, what other innovative captive structures is Tennessee exploring to cater to the specific risk management needs of mid-sized businesses?
Tennessee offers many captive structures including pure captives, associations, agency, sponsored cell programmes and risk retention groups. Much of the innovation in captive insurance is driven by the captive managers and owners.
Our role in the innovation process is to evaluate the new proposals from the prospective of whether they are complying with the current statutes and regulations or not. We regularly work with managers, owners and other industry service providers who propose these types of updates.
How is Tennessee addressing the potential talent gap in terms of qualified captive managers and risk management professionals to service the growing number of mid-market captive formations?
We do not regulate captive managers, but we do check service providers and require captives to use approved captive managers, accountants, and actuaries. We find that having a robust training programme to build upon the foundation offered by an accredited education in accounting is the best approach to building talent in-house.
How can mid-sized businesses utilise technology solutions to streamline captive operations and ensure efficient claims management processes, considering their potentially resource-constrained environments?
It is important for mid-sized businesses to focus on having good fundamentals and a solid foundation for their captives. Using established, reliable software suites and service providers to manage their operations, ensuring adequate capitalisation, and building slowly are all factors that can allow a captive to flourish. Once established, captive owners should consider innovating, using more advanced solutions, including advanced risk management software.
How can mid-sized businesses integrate their captive strategy effectively with their broader long-term enterprise risk management framework?
Captive owners should include increased retentions and additional lines in their captive plans over time. Once they have built a firm foundation and maintained stable operations for a few years, companies typically evaluate what other lines they can put into their captives as captives should not be static entities.
Most captives start off with property and other typical enterprise risks. After gaining some traction, the owners should then explore which other lines where they can retain some risk.
Retaining layers of workers’ compensation, medical stop loss, cyber, and other lines are common starting places.
What metrics and frameworks does Tennessee recommend for mid-sized captives to benchmark their performance against industry standards and measure their captive's overall effectiveness?
We do not conduct cost-benefit analyses for captive owners. However, owners could compare various analytics (loss/expense/combined ratios, etc.) to industry metrics to get a sense of how the captive stacks up against others in the industry.
Companies should also consider doing some comparison shopping, like getting quotes for comparable commercial coverages and comparing what their quoted commercial programme costs would have been against what their captive programme has cost.
Part of being a responsible captive owner is understanding what your options are and how your captive is performing versus the alternatives. Working with your captive manager and broker to determine the best solution for your business is an important part of the puzzle.
What lessons from managing such complex captives are you applying to make Tennessee more attractive to mid-market companies, particularly in terms of regulatory clarity, service levels, and addressing the unique needs of larger, more sophisticated captives?
We have proven that having a well-documented regulatory framework and highly educated staff who are dedicated to providing great customer service is crucial to attracting captive owners. Of course, there are other factors, and the total criteria is part of the captive owners’ overall plan.
As for more sophisticated captives, we try to leverage our relationship with our providers and keep up with industry trends so we can understand the needs of these entities. We also ensure that our team is constantly training to keep up with industry trends and staying on top of best practices.
