ALT/r Consulting
Jason Stevenson, director at ALT/r Consulting, sits down with Karl Loomes to discuss the role of an independent consultancy and how to advise clients interested in captive insurance
Can you tell us a little about ALT/r and your role as an independent consultant?
As an independent consultant, we work with all the major off-the-shelf, group captive product producers. We also work with the independent single-parent captive producers. We do independent consulting relative to captive setup, captive management, captive formation, captive theses and thought processes, as well as feasibility and viability work. We help people assess what exists in the market.
Our role is to support independent agencies and their clients as they think about whether or not a captive is a good idea for them, and if it is a good idea for them, we help them figure out which direction they should go.
There's no one-size-fits-all element to the captive environment, so our role is really to discern what is right for the client, and we do that through the independent brokerage model. Our unique differentiator is that we distribute what we do through independent agencies, and as far as I am aware, we are among the only ones. We are not a captive manager, so we do not compete in that space. We are a purely consulting division that allows independent agencies to bring in experts where they need them.
There is a big vacuum in the market related to that, because generally, the off-the-shelf product market has done such a good job of monetising its product and becoming sales organisations that they take up so much space. In many cases, independent agencies do not really know what exists in the market, and important clients only see whatever one of those off-the-shelf product producers has to show today.
What are some of the distinct advantages and disadvantages of off-the-shelf compared to structured captives, and what considerations do you take into account when recommending either to your clients?
Off-the-shelf products have a tonne of advantages, in the sense that they are already built. They are a proven machine. They have been tested, and worked well.
The downside, or the disadvantage, is just that they are not customised and they are not unique. they do not, in general, provide for the diverse requirements of any particular business that needs or is interested in a captive insurance solution.
Generally, an off-the-shelf product is going to insure three or four lines of coverage. Usually, that is casualty coverage in the US, general liability, auto liability, and workers compensation. I consider that only a partial solution for part of the problem.
There are quite a few other exposures to a business. On the one hand, that may be the majority of a business's insurance premium spend — and so it seems like it has significant value.
But by contrast, it really is only three or four lines of coverage, and businesses have risk in a wide variety of areas, sometimes insured, sometimes not.
If you look at the other side of captives, which are not off-the-shelf or custom produced — typically single-parent structures — you are able to insure just about anything that is fortuitous and otherwise unpredictable. You can create an insurance vehicle that will insure all those things with a lot more control.
Are there any specific considerations that small and medium-sized enterprises need to be aware of?
Small to medium, obviously, is a function of definition. For a trucking company, for example, small to medium is a totally different thing than say, manufacturers. If you are measuring insurance spend, you have got very different turnover and gross revenue figures, with the same amount of insurance premium or risk. In general, however you define it, small and medium-sized enterprise (SME) insurance was typically reserved for off-the-shelf and group products, because there has been a vacuum or limitation in a single-parent environment.
In a sense that while single parent structures have always been functionally capable of handling SMEs, the large and largely international brokers and captive managers, have been focused on the Coca Colas of the world; the Premier Leagues; the NFL teams of the world — where you have massive global risk — and therefore you need your own insurance company. In the last decade, single-parent captives have ‘migrated downward’, in the sense that they are now relatively far more commonplace for small and medium-sized enterprises. This is because of their access to people like me. Their access to information is so much greater, they are not dependent on having just one expert in their region, or one or two in their country, or just one little broker or another to bring them the information. The way that people buy their insurance and the way that people buy their risk management services has changed. It used to be that you would buy your insurance from a guy with a cocktail in one hand and a business card in the other, from your country club or local pub. Today you have convenient online international access. So information and access to experts have now proliferated, with access to non-off-the-shelf, non-marketed products that did not exist before. This, incidentally, is largely the basis for our business model. We can affect outcomes anywhere.
What would you say are some of the most pressing regulatory compliance and tax considerations facing firms, and how do you help them navigate these?
I would say, frankly — and especially in an off-the-shelf product environment — there is not a whole lot of regulatory or compliance noise. They are simple, in the sense that they come ‘delivered in a box’. You open the box and your captive programme is effectively ready for you. The majority of the tax, compliance, and regulatory considerations, have already been assumed, paid for, and managed, meaning you get a product ‘ready to roll’.
Alternatively — just like it sounds — if you create something from scratch, you have got more compliance and regulatory considerations, and especially here in the US, tax considerations. It used to be that the majority of single-parent captives were offshore — Bermuda and Cayman were the big domiciles. There were certain advantages associated with that, largely, perceived tax benefits. But really, that was about regulators. Cayman and Bermuda especially, having experience and a regulatory environment that understood what single-parent captives and self-insurance was all about, and creating a business environment that reduced the viscosity of trying to put a product or a programme like this together.
In the last 10 to 15 years, domestic markets — or states as insurance is regulated at the state level in the US — have, in many cases, expanded or broadened their regulatory and insurance divisions of their governments to allow for single-parent captives, and allow for product production and distribution, largely to retain business within their state, because they want to be competitive. I would say that tax complexity, which is not associated with regulatory authority, has gotten more and more complicated, and has a lot more attention on it, both from the EU and from the United States.
By contrast, I think regulation of the insurance company itself, such as consumer protection, has actually been easier and has become simpler to navigate, on account of the markets where captive insurance is built, getting more and more competitive. This competitive environment has been good for consumers. If you have a choice, you are going to choose a regulator that makes the most sense for you, which means regulators are required to be a little more competitive.
What would you say are some of the more common misconceptions or apprehensions that come from your clients looking at captive solutions?
Captives have these really tantalising headlines — 'You have more control', 'You choose your own rates', 'You get a bunch of money back if you do well', 'Tonnes of tax advantages' — right? These are the selling points of a captive, generally, and of course they create interesting or compelling headlines. However, captives are a form of self-insurance. There is no free lunch. So in many cases, a client is very excited about this, what they may see as a new, revolutionary way to buy insurance that is going to provide them all those great headline advantages. But the misconception, of course, is that all of those things are assured — if you are in a captive you are going to have all these great outcomes.
The reality is that captives are a form of self-insurance, and self-insurance means that you are on the hook for your claims. You do not do that without some measure of protection, and some measure of understanding about what your risk is, quantified in a way that makes it possible for you to comfortably take that risk. Even so, you could have bad years. You are in the insurance business — group or single-parent, off-the-shelf or individually funded. Captives are a lot more than their headlines, just like anything else. I would say the common misconception is essentially, that if I get myself into a captive arrangement, I will have a lot more money and a lot of tax advantages, when the reality is that that is certainly possible, but not guaranteed.
How do you work with traditional insurance to ensure a smooth transition, or integration, for firms adopting captive solutions?
The net of it is, you are not exiting or leaving the insurance market. Captives are additive and complementary to your commercial insurance programme. In a group captive environment, for example, and in an off-the-shelf product environment, typically what firms do is switch insurance carriers. These new insurance carriers can have an arrangement with the captive, but they are linked to one another, so that a firm is not fully self-insured. For all of their risk, they are sharing some of it with a good carrier. That carrier provides services like claims management and fronting paper, and enables companies to provide certificates to your customers and vendors that look, act and feel, like regular insurance — which means they do not get spooked by the idea that the firm has this other arrangement involved.
In that sense, it is a pretty traditional transition. You cancel or let one policy expire, you bind another, and you have made the transition in a group captive structure. By contrast, with a single parent structure, typically you are saying to either the existing commercial carrier or a new carrier: “I currently insure the majority of my risk. I have a small retention or a small deductible of some kind. I would like to, at renewal, take a much larger deductible or larger retention. I would like to go from US$10,000 to US$250,000.” The carrier therefore stays involved, but just stays involved at a higher level, and you receive a meaningful discount in exchange for taking on more risk.
You utilise your captive — your new insurance company — to insure the difference between zero and US$250,000. What you have done, in that sense, is internalise, or self-insure, the areas where you feel like you have got control. You are not really transitioning away from your insurance carrier, more like you are transitioning the complexity of your arrangement.
What kind of novel products and captive structures do you know of and work with, handling emerging risks such as cybercrime?
It is one of the exciting advantages of being in the captive space, that you get to build, create, and distribute new things. It is not the same old iso form auto liability that has existed since the 1950s; there is a lot of variety and a lot of development work.
Cyber is new in one way, in the sense that there is a new version of a cyber problem every day. In another way it is not new at all — cyber issues have been going on for more than 20 years.
There are all kinds of other emerging risks. Most recently in the US, cannabis is a major area. Cannabis has been legalised throughout many states in the US, and that is an emerging risk in the sense that it has never been covered before. Regulation is still in limbo at the federal level, so there are a lot of captive formations supporting those in the cannabis industry, navigating the sort of regulatory environment where there is no traditional coverage available.
AI, of course, is a key topic getting mentioned everywhere. A couple of years ago there was a big push to figure out how to insure drone activity — drone incursion, drone liability, and drone crashes. We see all kinds of things. We have been building products for colleges and universities. There are professional sports leagues who need to insure around traumatic brain injury.
There is sexual abuse and molestation as an emerging risk, which is coming about in the US with changes to the statute of limitations rules. This means if you were in an environment where an abuse or molestation event occurred, even though there may be a statute of limitations, they will waive the statute of limitations. This means you have got forever risk. Naturally, insurance companies are not particularly keen on taking a forever risk.
So there are plenty of ongoing and emerging risk areas where the traditional insurance market is unprepared or unwilling to take on the risk in so many unknown ways. There's a never-ending string of emerging risk issues. Depending on what your emerging risk is, the likelihood is that you are going to need a captive to take care of it. The commercial insurance industry is, traditionally, slow to respond.
What are some of the recommendations you would give brokers aiming to help their clients with captive insurance?
For the broker, to a large extent, you know the client, its size and complexity, and its capacity for risk-taking. You, as the broker, are the expert and have context, and I think it is incumbent on the broker to continue to provide proactive solutions. Captives are being introduced earlier and earlier, or at smaller and smaller insured levels. You should look at a client, and if it is good at risk-taking, if it is willing to bet on itself — almost at any size of six-figure insurance premium and up — you should probably start to broach the subject of captives, because it is only a matter of time before the client hears about it elsewhere.
It is probably appropriate to start illuminating what happens to insurance as they grow beyond a certain point of impetus. If you do not have expertise, experience or access to the right information or the right people, that is exactly where we fill in. As a broker, if you need help talking about captives — how they work, are they right for your client, what is the plan to evolve into a captive or self-insured environment — you bring in an expert to help you navigate that. That is our role.
I would say to any independent brokers, if you think there is a chance that your client could be interested in the concept of a captive, you should bring it up proactively The train is on the tracks, and that industry is growing, and it is a much better message than “I want to sell you insurance”. Marketers in the captive business are better and more aggressive than the marketers in the traditional insurance market, so if you do not bring it up with your client, they are going to hear about it somewhere else, and you will be behind.
I tell everybody who will listen, if your client calls you and says, “Hey, you know anything about captives?” you are probably in trouble. Your clients are not active in the captive industry. They are at the country club or playing golf, or they are at the bar with their buddies. Worst case scenario, they got a phone call from somebody who talked to them about all the advantages of a captive and you didn't bring it up. The most likely thing is that the advanced and extremely aggressive marketing people in the captive industry called and said, “How come your broker hasn't talked to you about captives? You're a great fit!”
What does the future hold for the captive industry, your clients and your business?
I think the insurance industry is ready for a pretty significant change in its delivery models, and frankly, its underlying expense structure. I mentioned AI earlier, and though I hate to be on the bandwagon, AI can write insurance policies. You do not need a lawyer or an underwriter anymore.
AI can adjust insurance policies. It can decide whether or not the claim data that was entered matches the claim. There are no judgement calls necessary by a human being. AI can probably predict which clients are right for captives.
As a result, clients are going to be the beneficiaries of that, as the delivery mechanism for insurance and risk management becomes easier and more commonplace. When that happens, they are going to have access to the concept of captives, which, for the right clients, are an enormous boon.
It is a better flexibility tool. It is a better tax tool. It is a way to collect and retain margin, where the insurance company was collecting and maintaining that margin before. The future looks like clients will take more active control over the way that their insurance looks, because they have better access to what the risk really quantifies out to. It has always been an underwriting mystery — what ingredients are in the cake that got baked? Now they know all the ingredients that were in the cake, and they have got access to an oven, a baker, and they are going to customise what they want the way that they want it.
The future looks a lot like clients having more control and more access, and very, very little geographical limitations, which has been traditionally kind of a dependency in the insurance industry. You have got one broker in a spot, and they know everybody in their circle. That circle is now the size of the globe.
