Let’s talk insurance: A look behind the captive sales pitch

by Mark J. Ram

We’ve received incredible response from our January 2005 article regarding trucking captives – a self-insurance concept where you ultimately take on your insurance risks. In particular, we’ve been asked to comment on a captive’s many sales pitches and the realities about them, some of which are listed here:

“The captive buys reinsurance, so you don’t have to worry about large losses.”

Reality: In trucking insurance, multi-million dollar losses are frequent and may be absorbed partially by reinsurance coverage.

However, nothing is free, and reinsurers will want repayment for losses. That will come in the form of reinsurance rate increases, whether you’re in a captive or covered by a traditional insurer.

Reinsurance increases will affect a captive’s fewer members far more severely than if the same increase was spread out among the tens of thousands of accounts of a traditional insurer.

In addition, captives typically pay much more than traditional insurers for the same reinsurance, as they neither have the economies of scale nor the history of experience that give reinsurers confidence in their operations. The net effect is higher costs, volatility and more risk.

“Insurers don’t reward you for years when you have low losses. Join our captive and keep the profit to yourself.”

Reality: If this was how insurance worked, no trucker with low losses would ever need to buy insurance.

Major losses happen all the time in trucking, even to the best trucking companies who have a few years of low losses.

A $5- or $10-million loss will wipe out any profit your insurer has made, and it would take decades of perfect loss-free years to even come close to what your insurer paid for that one big loss.

To manage this risk, all insurance providers – including captives – must ensure that adequate reserves are available from your good-loss years to pay for big losses when they inevitably occur.

The money for big losses has to come from somewhere, whether you’re with a traditional insurer or a captive.

Even experienced insurance companies have gone bankrupt or have left trucking trying to manage those large losses. In a captive, it’s not a question of sharing profits; it’s the likely reality of sharing losses.

“Our captive can handle your claims as well as a trucking insurance company.”

Reality: Big trucking lawsuits are commonplace, so it’s crucial that the people handling your claim have their interests closely aligned with yours and the skills to defend you properly.

A traditional insurance company has full-time trucking claims experts on staff, and their performance directly influences the insurer’s bottom line. As a result, a traditional insurer’s best interests – to see your major lawsuits against you settled quickly for the lowest possible payout – are perfectly aligned with yours.

Contrast this with a captive that outsources the management of your claims to an external firm. Such firms, whose primary source of income comes from billable hours, have no vested interest in the outcome of your claims.

So if your captive gets hit with settlement costs that could have been far less, it’s you who will feel the pain – not the outsourced claims manager or the captive’s salespeople. As well, an unnecessarily large loss will follow you around on your record for years.

“In a trucking captive, you’ll receive a dividend.”

Reality: To receive dividends, the captive must be consistently and predictably profitable. As you know, long-haul trucking has been one of the most unprofitable types of insurance in Canada. Being a part-owner in a trucking captive places you squarely in an industry where, on average, $1.50 and even $2.00 have been paid out for every $1.00 collected in premiums.

The far more likely outcome is that you’ll be forced to put extra money into the captive, rather than get dividends out.

“In a trucking captive, you’ll get cheaper insurance.” (This is probably the sales pitch that most gets a carrier’s attention.)

Reality: Many businesses are known to quote a low, first-year price to get you to join, only to jack up the price dramatically in subsequent years, once you’re locked in.

The cost of captive insurance in trucking – including the capital you have to pay up front, the higher cost structure with guaranteed commissions and profit margins for the various salespeople and middlemen, higher reinsurance rates – could end up costing you a lot more than you were told, and certainly much more than traditional insurance.

In a trucking captive, after all of the sales pitches and promises, it’s you, as an owner – not the salesmen – who’s on the hook to keep the business afloat in times of shortfall. Isn’t this counter-intuitive?

As with most things, caveat emptor – buyer beware – applies.

– Mark J. Ram is president and CEO of Markel Insurance Company of Canada. Please send your questions, feedback and commentary about this column to letstalk@markel.ca. For more information about Markel visit www.markel.ca.

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