Among the fastest growing costs for trucking companies in recent years has been insurance. From 2013 to 2014, insurance costs rose 11%, then in 2015, they increased 29%. From 2013 to 2016, insurance premiums rose 19% overall.
Larger fleets sometimes lower their overall insurance costs by self-insuring, although they are also investing some of that premium savings in advanced safety technologies, according to the American Transportation Research Institute. Smaller fleets often don’t have the financial resources to self-insure, so more of them are turning to “captive” insurance programs.
What is a captive insurance program and how does it differ from traditional insurance? According to the International Risk Management Institute (IRMI), a captive program is one that is “owned by the insured.” Basically, captives spread out the risk among those who invest money in the captive.
Andrew Ladebauche, CEO of Reliance Partners, says that captives are for those companies looking for insurance but also to have some ownership, and perhaps profits, over that plan. The hope is that the group makes money and all the “investors” would be returned the profits.
“They have greater control because they invest more of their resources into the program, but there is more risk,” he explains. If the captive loses money, all the insured lose money. But they can also be advantageous, especially for fleets with good safety records.
“Their goal is to get participants paying what they should be paying based on their risk rather than what the market says they should be paying,” Ladebauche notes. “Captive participants see all the costs in the program, but they also see profits if all the members operate [in a safe way].”
In essence, each participant shares the risk of all participants.
“Why a captive instead of deductibles/retentions or self-insurance? That is the magic of insurance,” writes IRMI in an explanation of captive insurance. “Current accounting and tax rules do not permit deductions for reserves held for the payment of losses in the future. But, if those funds are collectively called an ‘insurance premium,’ they are deductible. Self-insurance is a legal form that is difficult, complex, and really only for the very large risk. Thus, if you are to consider a captive as a cost-effective solution, you must structure it in such a way as to participate in the profits of your own risk, not just accept unwanted costs. You must structure and partner in such a way as to achieve a real cost savings. To do that, you must finance more than small risks.”
Therein lies the larger risk. Under a captive program, a carrier would be putting more of its money into the captive. One upside is that members of the captive have the ability to determine who gets into the group, so a carrier with a lot of claims is not likely to be approved for inclusion.
Just like a traditional insurance program, a captive can offer many lines of coverage, and Ladebauche explains that captives grew in popularity because they often offered coverage that was not available at low cost in traditional plans.
Captives are not new. In fact, according to Rob Hoyt, Moore Chair and Department Head at the University of Georgia, the first known captive was created at Lloyd’s Coffee House in 1687 London. That captive focused on a group of ship owners who were looking to share their risk burdens. In his white paper, “The Evolution of Captives,” Hoyt notes that the New England textile mills in the 1800s shared fire risk in the same way and the Episcopal Church in the U.S. in the early 1900s created the Church Properties Fire Insurance Corporation.
The modern history of captives came about in 1955, Hoyt writes, when Frederic Reiss coined the term in Youngstown, OH, when Youngstown Sheet and Tube formed the Steel Insurance Company of America. Hoyt noted that in 2010, global captive premiums reached $55 billion, about half coming from U.S. businesses.
Among the benefits of captive that Hoyt mentions are broader coverage, stability in pricing, direct access to reinsurance, increased control of the program, and improved structure.
Ladebauche says in the past year, he has had more conversations about captives than ever before as more fleets are looking at ways to reduce their costs.
A captive is not for every fleet, but for those that are seeing rising insurance costs despite good safety records, it presents a possible alternative and perhaps a path to lower costs.
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