Alternative Risk Macro Trends (2013 edition)

Transcription

1 IN THIS ISSUE Alternative Risk Macro Trends (2013 edition) Phillip C. Giles, CEBS Artex Access Programs Capacity Expertise Artex Analytics Strategic Risk Analytics Claims Analytics and Advocacy Design and Management Captive Design and Management CONTENTS Pg Group Captive Update Vantage - New Stop Loss Program Bermuda Market Update Artex Analytics Update Artex Staff News 60 - Second Seminar: After hibernating for nearly a decade under a compressed rate winter, the insurance market is showing initial signs of awakening to a blossoming spring of firmer commercial pricing. The passing of this season s vernal equinox did not yield a hard market in full bloom, but the initial buds of an underwriting amelioration are beginning to form within some lines of business. The generally accepted practice of referring to insurance markets strictly in terms of soft or hard cycles has become an antediluvian characterization. More than just changing market cycles, the world of commercial insurance is rapidly evolving and expanding. Whether it s a new emerging risk (think cyber liability); changes to the prevailing regulatory environment (such as PPACA, Dodd- Frank); new ways to finance and manage risk (Insurance Linked Securities, CAT Bonds); or maybe the effects of increased market capital, capacity and competition, the traditionally accepted characterizations of cyclical insurance conditions have eroded and are losing relevance. Being able to respond to an evolving risk and insurance environment has become more important than simply adapting to the perception of changing rate cycles. That being said, here are a few expected trends for 2013 and beyond. Market rates will continue to increase: Due to compressed performance results in underwriting profit and investment return, along with a reduction in reserve releases, insurance rates will increase but 2013 will not be considered a hard market as measured by conventional standards. Professional lines, Property - especially in areas not previously perceived as catastrophe-exposed (e.g., U.S. Northeast), and Workers Compensation will experience the most significant increases. As market rates in some lines increase: Alternative risk transfer mechanisms will flourish: As insurance carriers look to increase rates and/or restrict coverage terms, the use of alternative risk programs will continue to expand. During the past year, many of the top captive domiciles experienced significant increases in new formations. Most forms of alternative risk transfer, pure captive, group captives including Risk Retention Groups experienced growth during Micro captive formations were achieved in record numbers. With more than 300 captives under our management in 15 onshore and offshore domiciles, Artex is one of the industry s leading captive managers. As the use of alternative risk increases: Participation in group captives for middle-market insureds will increase: Group captive participation provides middle market insureds with the ability to collectively assume risk and benefit from risk transfer structures that have been more traditionally reserved for much larger entities. Group captive participation is estimated to represent $1.3 - $1.5 billion in premium with an estimated $200 million of new growth in 2012 alone. As capacity for excess workers compensation and large deductible coverage becomes more restrictive (fewer carriers, rising attachments and increased rates) many mid-sized employers will gravitate to group captive programs in order to achieve long-term stability and increased control. Artex manages 20 different group captives and specialty programs that are designed to address the unique risk management needs of middle-market employers. As group captive participation expands: New uses for group captives will emerge: As implementation of the Affordable Care Act (ACA) provisions begin, one of the fastest growing industry trends is the use of captives to provide medical stop loss coverage for employer health care plans. A recent membership survey by the Captive Insurance Companies Association (CICA) revealed that 25% of respondents are likely to place medical stop loss coverage in their captive within the next three years. Nearly 80% of large U.S. companies self-insure their benefit plans; however, many smaller to mid-sized employers face barriers when they try to self-fund individually. Group captives can increase accessibility to stop loss coverage and provide advantages of group leveraging power to this market segment. Artex s new Vantage program is uniquely structured to accommodate this rapidly growing market segment. Artex continually builds new programs and introduces services that innovatively respond to evolving market conditions such as those mentioned above. Artex is one of the largest and most comprehensive alternative risk and specialty program management firms. The basis for our success is predicated on adaptability and creativity in response to client needs, changing market conditions and staying ahead of competition. We look to redefine rather than accept status quo in response to changing market conditions.

2 The Refreshing Alternative for Risk Transfer Artex Access Group Captive Update Not ready for a captive? Transfer the risk and relax with Artex Light! Guaranteed cost program offering Workers Compensation or Multi-Line (AL and GL) coverage to a wide range of risk classifications. Ownership participation in a group captive can provide alternative risk transfer advantages to middle-market employers that would otherwise have few funding options. Throughout 2012 Artex group captives have distributed more than 9.62% from premium dividends and returned 15.28% from loss funds to insured members. Artex currently manages twelve different group captives accommodating a broad spectrum of industries, some captives serving a specific industry classification while others serving multiple industries. Two of our most popular programs are profiled below: Premium Range: $100,000 - $1,000,000 + A Rated Carrier No Risk Sharing Unbundled Guaranteed Cost Structure 24/7 On-line access to loss runs 24/7 On-line certificate issuance Artex Light features enhanced service functions provided by Artex that includes policy issuance, claims advocacy, loss control, and a streamlined audit process. Visit our web site, to view or download a comprehensive catalog of all Artex specialty programs and group captives. Specialty Trades Insurance Program STIC was formed in 1999 to provide coverage to a select group of contractors having the common belief that insurance can be a manageable cost. STIC provides risk management solutions specifically tailored to meet the unique needs of electrical and mechanical contractors as its preferred classification. Territory: National Captive Domicile: Vermont Lines: AL, GL, WC Minimum Premium: $300,000 STIC is open to electrical and mechanical contractors having a strong commitment to controlling risk and minimizing losses. Members are encouraged to attend semi-annual board meetings, as well as actively participate on a program committee of their choosing.the principal mission of STIC is to proportionally shift control of the insurance program from insurers and place it in the hands of the insured members. Benefits can be expressed in tangible terms such as insurance cost savings as well as intangible terms such as the creation of a safer work environment. Millennium Insurance Program Millennium was established in While the program s origins began with a group of companies located in the Midwest, it has since grown to be national in scope. As a heterogeneous program, Millennium brings together a diverse group of companies. Territory: National Captive Domicile: Bermuda Lines: AL, GL, WC Minimum Premium: $300,000 Millennium has a 99% member retention rate over the past five years and added new members totaling nearly $2 million of premium in The program has had cumulative premium rate decreases of 37% over the past 10 years. The program s size, membership diversity, and careful approach to risk selection allows Millennium to capitalize on its spread of risk and optimize the dividend return potential to its insured owners. For additional information on Artex Group Captive Solutions, visit or artexprograms@artexrisk.com Group Advantage Investors Fund (GAIN) was formed in April 2011 by four Artex-managed, group captives to provide a proprietary solutions for their captive investment portfolios. Seven of Artex s group captives are now participating members in the GAIN fund. GAIN s mission is to provide specialized investment solutions aligned to the strategic objectives of its captive insurance company members. The Group Advantage Investors Fund is only open to select Artex group captives. RBC (Cayman) Wealth Management is the Fund Administrator, CapTrust Advisors provides investment consulting, and Artex Risk Solutions serves as the Fund Coordinator. The combined market value of the group s portfolio has increased 17% since its establishment through increased asset contributions and investment return. For additional information, contact: Mary Wallace - Division Vice President: mary_wallace@artexrisk.com or

3 INTRODUCING Artex Access Employee Benefits Captives The Group Captive Solution for Medical Stop Loss Coverage Vantage Preferred Participation Characteristics 50-1,000 active employees Desire more control over rising health care costs and health care plan design Financially strong Prepared to assume risk and make an investment to reduce health care costs Committed to a culture of health and wellness for employees Willing to participate in incrementally progressive risk management initiatives Most of all: committed to becoming a High Performing Company Vantage can help you become a high performer. As an employer participating in Vantage, you gain more control over your health care costs while maintaining the flexibility to provide a competitive benefits package. The rising costs of health care, coupled with increased regulatory complexities, have spurred an increased interest in self-funding of benefits by employers. Nearly 80% of large U.S. companies use a self-funded plan, enjoying significant advantages. But smaller to midsized employers - between 50 to 1,000 employees - face barriers if they try to use a self-funded plan, even with stop loss insurance. Vantage changes all that! Vantage, our newest specialty program, blends the advantages of self-funding medical costs with stop loss insurance, the stability of a group captive and successful risk management strategies. The combined strength of Vantage can help mid-sized employers reduce health care costs, improve employee wellness, streamline health care delivery and achieve long-term stability. Vantage helps reduce the cost of providing health care benefits through: Alignment: By self-funding their benefit plan, Vantage participating employers ("Participants") assume the first layer of health care risks and are rewarded for controlling cost. Flexibility: Participants determine the appropriate level of risk retention, offer a customized benefits plan, and tailor their health risk management program. Influence: Participants use their combined purchasing power to leverage discounts from service providers such as stop loss carriers, Third Party Administrators (TPAs), provider networks, and population health risk management vendors. Risk Management: Vantage provides a menu of risk management initiatives and wellness programs from which to choose allowing participants develop or expand a culture of healthy living. This helps reduce costs for all Participants. Turnkey Program: Vantage includes a turnkey group captive program that provides Participants with stability, risk diversification, and risk sharing with minimal administrative costs. Return of Profits: Captive surpluses are distributed to Participants rather than to an insurance company. Businesses with high performing employee health plans (high performers) consistently hold annual cost increases to about 2%. Projecting today's average costs against the typical increases over the next five years, these high performers would have health care savings totaling $1.2 million for every 100 employees. Would you like to join them? Visit artexvantage.com to view our introductory video or download the Vantage brochure For additional information contact Michael Madden, Division Sr. Vice President Benefit Captives at: artexvantage@artexrisk.com or is the official newsletter of Artex Risk Solutions, Inc.

4 ABOUT ARTEX UPCOMING CONFERENCES & EVENTS FOR 2013 ARTEX ACCESS ARTEX ANALYTICS ARTEX DESIGN & MANAGEMENT Artex Access Bermuda Market Update Bermuda Market Access BERMUDA Bermuda Captive Conference: Southampton Bermuda: June 10-12, Known as The World's Risk Capital, Bermuda is home to one of the largest and most important insurance and reinsurance markets in the world. Supported by more than 40 carriers with capital greater than $100 billion - this dynamic insurance market is able to provide creative, competitive, and highly rated capacity. PRIMARY LINES OF BUSINESS AND EXPERTISE: Excess Casualty Healthcare Liability Professional Lines VERMONT Vermont Captive Insurance Assoc: Burlington, VT: August Property / Property CAT Punitive Damages Wraps Specialty Coverages The Bermuda Market permits access only through properly authorized Bermuda brokers. All carriers accessed by Artex Risk Solutions (Bermuda) Ltd, maintain a A.M. Bests Co.rating of "A-" (Excellent) or higher. Bermuda Market Product Feature: Weather Risk Transfer By Carl Daly CHICAGO Captive Live USA: Chicago, IL: September TBD HAWAII Hawaii Captive Insurance Council Forum: Hawaii: November GRAND CAYMAN Cayman Captive Forum: Grand Cayman: December 3-5 Bermuda is known as an innovative market for excess liability capacity, as well as the place to buy Property catastrophe coverage for large natural hazard impacts such as earthquakes or hurricanes. However, one of the lesser known products available in Bermuda is Weather Risk Transfer. Weather risk impacts a wide range of businesses around the world every day. Exposures stem from a lack or overabundance of rain or snow, wind, sun or simply adverse changes in temperature. These exposures can significantly diminish budgets and adversely effect corporate earnings. The Structure Risk transfer can be used to assuage the impact of weather volatility. Coverage can be structured as either an insurance contract or a swap. The latter is where the client swaps a payment from the insurer in bad years for payment to the insurer from client in good years. Insurance premiums charged can range from 5% - 35% of the limit offered however, the norm is 10-20%. The limits offered can be up to $100 million. Weather risk solutions are customized to fit the specific needs of each buyer. Claims Trigger There is no deductible and the trigger for claims attachment is very transparent. Once a weather index has been agreed upon, for instance cumulative rainfall or snowfall, as well as the parameters of the cover (e.g. the point at which a claim is triggered and amount paid, such as per inch up to a maximum) it will be easy for all parties to know when there is a claim and how much is compensable. Prime Candidates Who buys this cover? Power companies that generate energy from wind, water, rain and sun are primary buyers of weather risk transfer products. Municipalities needing to hedge annual snow removal budgets, Farmers (crop insurance), the snow industry (ski resorts), golf courses, and theme parks whose revenues are weather dependant are primary purchasers. Retailers whose sales promotions may be impacted by adverse weather might also consider such products. Weather risk is a relatively small market at the moment, but changing weather patterns are likely to increase the demand for these products in the future. Carl Daly, Vice President, Artex Intermediaries Ltd can be reached at: carl_daly@artexrisk.com or For more information on weather risk coverage as well as other information on the dynamic Bermuda Insurance Market, contact: artexintermediaries@artexrisk.com or

5 Artex Analytics Update Active Case Study: Cable Company Intervention to Reduce Claims By Chad McGee For the past half-decade, much of industrial America has been affected by difficult market conditions and unfavorable financial returns. Insurance renewals during 2012 have also shown that rates are beginning to increase in some lines of business. Not a full market hardening, but a firming ascent never the less. Insurance rates are the same as any other corporate expense; if a company can save money through a proportional reduction of cost, then that is an area that should receive attention. Developing an effective risk management program that includes return-to-work programs, loss control, in-depth claims investigation, provider networks, vendor management, and aggressive in-house claims management is the obvious answer to reducing insurance expenses. Reducing both the number of claims incurred as well as the actual cost of each claim will, in most cases, result in a reduction in a company s overall insurance expense. The adjacent is a case study presents the results of an actual Artex Analytics client. The client, a large cable company, allowed our expert analytics team to complete a green-to-green analysis of the client s claim cost for the third quarter of 2011 versus the third quarter of The table highlights the performance results prior to and after implementation of Artex s claims intervention program. Key Performance Indicators Workers' Compensation Workers Compensation: The first column reflects periods prior to Artex s involvement (7/16/11-10/31/11) and the second column reflects periods during Artex s involvement. As reflected above, the number of claims reported for both periods are almost identical. However, there has been a decrease in the average lag time for claims reported and a significant decrease in the indemnity to medical only ratios. Typically, the goal is 30-35% for this parameter and Cable Company is now currently close to the targeted goal. There has also been significant improvement with regard to the average cost for both open and closed claims. As noted above, the average experience figures have dropped from $28, to $5, and $10,606 to $ respectively. Also notable is the improvement with regards to the average closing ratio which increased from 65% to 100%. 7/16/11 to 10/31/11 7/16/12 to 10/31/12 Claims Reported Lag (Days) 7 4 Indemnity to Medical Only Ratio 61% 38% Average Experience Open $28, $5, Average Experience Closed $10, $ Average Experience Indemnity $45, $13, Closing Ratio 65.0% 100.0% Liability Auto Liability Claims Reported Average Experience of Closed Claims $1, $ General Liability Claims Reported 10 1 Average Experience of Closed Claims $11, NA Comments and Suggestions Auto Liability: Almost identical numbers for the amount of claims reported for both periods. However, there has been an approximate 48% reduction in the average cost of closed claims. General Liability: Significant reduction with regard to the amount of claims reported. There is no value currently established for the average experience since the remaining general liabilty claim remains open. Although significant improvement has been made in all areas as noted above, additional improvement is expected once a formal return to work program has been completed. This would reflect even better results with regards to the indemnity to medical only ratios, average experience of claims and closing ratios. For more information on Artex Analytics, contact Chad McGee, Division Vice President: chad_mcgee@artexrisk.com or Identification of claim trends and irregularities allows Artex to develop and employ proactive strategies to mitigate risk, reduce loss costs and achieve effective claim resolutions. Concentrated interaction with clients and front-line service providers allows Artex to prescribe preemptive solutions for complex claims issues and implement strategies to achieve effective claim resolutions.

6 ABOUT ARTEX Social Media Update: Coming in May: Artex Mobile App! ARTEX ACCESS The high-performance Artex app is being developed as a native/web hybrid to deliver an optimized user experience by providing web-based content as well as the ability to download selected content directly to the mobile device. Specific versions for ios, android, and HTML5 devices will be available on the Artex website ( and various app stores. Presentation William Hinderks, Senior Loss Control Specialist. Artex Atlanta William is chairman of the American National Standards Institute (ANSI) Z15 Fleet Safety Committee. Bill and his team will present the program Develop and Sustain an Effective Fleet Safety Program at the American Society of Safety Engineers Conference in Las Vegas, NV in June. ARTEX DESIGN & MANAGEMENT New Appointments Andy Atsaves President Program Services: Mr. Atsaves assumes oversight of all Artex specialty programs and intermediary operations. Kevin Heffernan Chief Operating Officer: Mr. Heffernan will be responsible for coordinating all operational processes, Information Technology systems development, ongoing productivity and efficiency enhancements, and regulatory compliance. Elected Chairman Martin Hughes Senior Vice President Underwriting: Mr. Hughes will oversee all underwriting processes, new program development and market management. Fay Okamoto Division Senior Vice President, Artex Hawaii: Has been elected Chairman and Director of the Hawaii Captive Insurance Council. Karl Huish President Captive Services: Mr. Huish will oversee all of Artex s captive related products and services. This includes: Microcaptive, Design & Management, Group Captive, Benefit Captive and Analytics strategies. New Web Site: Have you visited our new web site? Our new site is easy to navigate and features all of our newly updated corporate information, brochures, newsletters, articles, white papers and educational webinar recordings. We have also begun to produce a series of short videos that provide insight into various risk topics and the corresponding Artex solution. Be sure to also follow our news feed on Twitter for real time Aretx news and Artex Risk Solutions is pleased to announce the following divisional executive appointments: JOIN US on LinkedIn We have recently launched the Artex Risk Solutions company page in LinkedIn. All things Artex can be found on our company page such as: relevant news to the captive and alternative risk industry, Artex announcements, articles and white papers authored by our experts, concise product and services descriptions, links to our solutionsoriented videos, and more. ARTEX ANALYTICS Artex Staff News You re Mobile So is Artex! A dynamic industry requires dynamic, on-demand access to information any time from any location! Our interactive app will feature solutionsoriented videos, news feeds, articles and white papers, product and service pages and special inquiry capabilities. Visit our virtual offices at artexrisk.com Chad Kunkel Executive Vice President Captive Services: Mr. Kunkel will oversee Group Captives and Analytics as well as Artex s warehouse and umbrella programs.

7 ABOUT ARTEX ARTEX ACCESS Subscribe to our contact list: By Bacho Vega, JD Articles, White Papers and Webinars: A variety of our published articles, white papers, recordings of past webinars and past issues of Artex Extra can found on our web site at Artex Risk Solutions holds periodic webinars which address a variety of alternative risk topics. To ensure that you are on our notification and subscription list, please send an to artexinfo@artex.com or register through our web site: WEBINARS: Upcoming topics include: Benefit Captives Micro Captives 831(b) Strategic Risk Analysis Claims Advocacy Artex RiskExchange And much more! ARTEX ANALYTICS ARTEX DESIGN & MANAGEMENT The 60-second Seminar: NRRA for Captives: An Encouraging Development The Non - Admitted and Reinsurance Reform Act of 2010 ( NRRA ) was part of the massive Dodd - Frank bill that imposed significant new regulations on the financial sector. Prior to the NRRA, self-procured insurance was taxed by every state. This potentially exposed tax payers to double taxation. The NRRA s main goal is to prohibit every state except the insured s home state from regulating and taxing non-admitted insurance. This expanded taxing authority could be detrimental to captives because the selfprocurement premium tax rates are generally between 3% and 5%, while the captive premium tax rates generally range between 0% and 0.4%. The unintended consequence of this approach would be the migration of captives from current domiciles to insured s home states. Such migration would replace the selfprocurement tax (3% to 5%) with the captive premium tax (0% to 0.4%), a substantial savings. Unfortunately, this migration would also eliminate the advantages of the current domicile, such as lower costs, experienced professionals, support services, access to regulators and statutory flexibility. Under the NRRA, home state is defined as: the State in which an insured maintains its principal place of business or, in the case of an individual, the individual s principal residence; or While over 30 states have passed captive legislation, (a) several states have not, If 100 percent of insured risk is located and (b) several of those states with captive out of the State referred to in clause legislation have little experience in (i), the State to which the greatest regulating this unique industry. This injects percentage of the insured s taxable additional uncertainty into captive premium for that insurance contract regulation. is allocated. Currently, there is no case law, federal In theory the NRRA would eliminate the legislative clarification or state action to potential for taxation by multiple states. provide guidance on this subject. HowThis seems to be a reasonable way to ever, recently there was an exciting and keep insurance regulated at a state level, encouraging development. In a letter to but coordinate taxation in a way that the new Chairman and Ranking Member reduces the burden on both businesses of the Committee, Judy Biggert, the and states, and increases enforcement. outgoing Chairman of the Sub-committee on Insurance of the Committee on However, the NRRA has caused some Financial Services in the House of Repreconfusion over whether it is applicable sentatives, stated, I wanted to make to captive insurance. Some state reg- you aware of an unintended consequence ulators have started to argue that the of the [NRRA] As a supporter of NRRA NRRA allows them to impose self procure- and an advocate for its inclusion and ment taxes on insureds in their state that passage as part of Dodd-Frank, I can tell purchase insurance from out-of-state you unequivocally that the NRRA was captives. never intended to include the captive insurance industry. Ms. Biggert went on to say, Captive insurance companies serve a vital role in the financial services industry and it is important that their industry not be negatively impacted by an incorrect interpretation of Congressional intent. In appreciation of Ms. Biggert s letter, Richard Smith, president of the Vermont Captive Insurance Association, stated: This endorsement from the outgoing subcommittee Chairman, who played a substantive and important role in crafting the NRRA, makes it crystal clear - captive insurance is not and never was intended to be included in Dodd-Frank. With the clarification and support offered by Ms. Biggert s statement, captive owners may rest assured in their operations. Captive owners would benefit from counsel from their attorneys, tax advisors and captive managers when making any final decision or changes regarding this subject. However, Ms. Biggert s opinion and statements currently provide the best source of information on this subject. Her statements as a Congressional insider clearly delineate Congress intent not to include the captive insurance industry in the NRRA. Captive owners should be able to make choices of domicile based on factors that will ensure the success of their companies and not fear of uncertainty in the law. Bacho Vega, JD, Regulatory Manager Artex Risk Solutions, Inc. can be reached at: bacho_vega@artexrisk.com or