Greg Agnone, president and CEO at Chestnut Hill Insurance, on why partnering with an independent captive advisor that operates on a ‘best interest standard’ will help make the most educated decisions for you and your business

Abraham Maslow is credited with saying the following: “When you are a hammer, everything looks like a nail.”

My interpretation of this as it relates to insurance is that if a person is familiar with one product or solution, then they tend to think that is the only solution.

Ever talk to a life insurance salesman at a cocktail party? This is not a judgement on the integrity of anyone but merely an observation of human nature.

Financial professionals are held to a higher standard than insurance professionals and it shows, in my experience, as both a financial professional and insurance professional.

I have observed that the trust factor when dealing with potential clients is quite different between the two.

While insurance professionals seem to be held at arm’s length getting information on an as-needed basis, financial professionals are often more trusted and obtain information more readily.

My personal belief is that this is so because financial professionals are held to a ‘best interest’ standard and must prove through justification that all options were considered. This is not the case in insurance.

To illustrate my theory, let me ask a simple question. Is the water in the Cayman Islands green, blue or brown? Posing this question to several people, their answer is ‘blue’ most of the time.

However, if they knew the answer ‘aqua’ was a possibility, they would most likely pick it. They didn’t pick it initially because they didn’t know what they didn’t know. In other words, they didn’t know it was a choice.

The same is true of many captive practitioners who show their prospects two or three ‘suitable’ choices without even revealing the ‘best interest’ option because they are unfamiliar with it.

The ‘best interest’ advisor/consultant looks at all the tools available and explains the pros and cons of each. In the captive business there are many decisions to be made.

Among these choices are choice of domicile, third-party administrator, investment advisor, auditor, reinsurer, fronting carrier, retention level, as well as many others.

What you need to know before setting up your captive

Choice of domicile is a consideration that goes well beyond where the captive would like to conduct their board meetings.

Onshore versus offshore brings with it tax considerations that should be carefully considered. Capital requirements as well as domicile regulation is also important.

These items merely scratch the surface of what goes into the decision on where to set up your captive. Service partners are plentiful and the range of effectiveness and expertise in the captive arena is wide.

Claims handling through a third-party administrator can make or break a captive. Partnering with the right firm with direction from a ‘best interest’ consultant will take into consideration the reputation and track record in settling claims for a fair amount while taking advantage of cutting edge technology like artificial intelligence to minimise loss severity.

Fronting carriers and reinsurers must be evaluated for financial strength as well as experience and dedication to the captive business. Just because a carrier has an AM Best rating of A+ does not mean that they are captive experts.

Reputation and tenure of captive professionals are key here. In addition, the decision needs to be made among the many types of captives including, but not limited to, single parent, homogeneous group, heterogeneous group, association, agency, rented cell, etc.

The list goes on and on. So when asked what the best choice is, the best answer is ‘it depends’. What does it depend on, you may ask? Some of the questions that need to be explored include the following.

What lines of business would the client like to place in the captive?

Many existing groups limit the lines of business that can be placed in the captive. This may not be desirable from the captive’s standpoint.

For example, should the client consider a workers’ compensation-only captive when this highly desirable line can be used to leverage their harder-to-place lines like commercial automobile, products liability as well as cyber liability.

Heterogeneous versus homogeneous?

Are you willing to share best practices and other trade-specific information with people in your industry? If the answer is no, then a homogeneous group is probably not right for you. I have sat in board meetings where you could cut the tension with a knife. Familiarity breeds contempt as they say. Getting people who genuinely don’t like each other to agree on a course of action is somewhat difficult.

Group captive versus single parent?

Size and control are critical factors here. If the premium that you are considering for a captive is too small, you will have a hard time finding partners to consider your proposal. In this case, a group captive would be an alternative choice. Assuming that size is not an issue, control is a very important consideration that will follow. Assume you are a $2 million risk that gets one voting share for entering a group scenario and you are involved with ten other $200,000 risks who also get one voting share. When a item comes up for vote you will get roughly a 9.1% say in the decision, despite paying 50% of the groups premium. To make matters worse, you will carry 50% of the groups expenses further adding insult to injury. If you are someone who cherishes control of decision making, then this is certainly not a scenario in your best interest.

Which homogeneous group?

It is very important to choose who your business partners are. Would you rather share workers’ compensation losses with a coal miner or a restaurant? All groups are not created equal. The size and make-up of the group is very important and something that requires close consideration. Another differentiating factor among groups is the self-insured retention. What is suitable for some is certainly not suitable for all. Your size, appetite for risk, and previous loss activity must be considered when making this choice.

Conclusion

The considerations outlined above are merely a starting point. An in-depth analysis of all the moving parts of the opportunity is needed and these areas of concern should not be considered all inclusive. So where do we go from here?

My advice is simple. A business considering a captive should engage an independent consultant that operates on a ‘best interest’ standard.

While going through the process of selecting a captive advisor, it is really important to determine that the advice given is completely objective in nature and provided by a captive professional with enough experience and professional contact in order to obtain the information that is needed to help you make the most educated decision without reservation.

Ask the consultant to fully disclose any potential conflicts of interest that may cloud their recommendations and expect them to act with a duty of care and loyalty to you and your firm.