Control Workers Comp Costs with an Employer- Owned Captive

By: James Rothman
Date: 3/1/2007

Albert Einstein once described insanity as "doing the same thing over and over again and expecting different results." For staffing companies that put their workers compensation insurance out for bid with traditional insurers with the hope of lowering premiums, the ritual has become an exercise in futility with an all too disappointing outcome.

Traditional insurance products have not served the industry as well as we would like. That, coupled with a scarcity of offerings in the alternative marketplace have left many staffing executives feeling the pain of high premiums and looking in vain for fresh answers to their workers compensation problems.

Exploring Alternative Market Options
As a funding source and added-value solutions provider to hundreds of staffing firms, I had heard persistent complaints from my clients about their workers compensation woes. They longed for the rates, service and control - to which they had grown accustomed in their accounts receivable finance packages - to be accessible in their workers compensation insurance, too.

Recognizing the impact of rising insurance premiums on my clients' profitability and cash flow, I called a long-time associate, Bob Barrese, executive vice president with Illinoisbased Assurance Agency Ltd., to explore the creation of a viable alternative market insurance program for staffing firms.

"Everyone complains about their traditional workers compensation insurance," Bob told me. "To create a sustainable alternative, we need a group of educated insurance consumers who are committed to playing active roles in controlling losses and costs."

Creating a Captive for the Staffing Industry
During a seminar for almost 20 staffing clients, we received the confirmation we needed to pursue the solution we envisioned. These entrepreneurial business owners demanded more control and independence in shaping their workers compensation plan, and pointed to the creation of an employer-owned captive - a closely held insurance company whose business is primarily supplied by and controlled by its owners. In this new captive, dedicated to the staffing industry (excluding construction staffing companies), the employer-owners are the "shareholderinsureds" and actively participate in decisions influencing underwriting, operations and investments.

The new captive insurance company concept emerged as a joint development venture between insurance and financial services providers. The insurance partner provides sales and risk management services to the captive, while the financial services partner provides the financial support necessary to build the program -- including helping the members raise the up-front cash requirements or Letters of Credit needed to participate.

The plan's basic model is that of an employer-owned captive reinsurance company utilizing an A/B or frequency/severity fund model commonly used by captive managers for over 30 years. The captive is being formed by an A-class group of founding members developing between $3 million and $4 million in standard premium. Once the A-class is closed out, a B-class of non-founding members will follow. It's anticipated that with the existing client base and continued shifts from traditional insurance to non-traditional solutions, the captive will grow to more than 50 members and over $16 million in program premium in the next three years.

The Benefits of Ownership
Operating more efficiently than conventional insurance, the captive can apply a higher percentage of the premium dollar to claims. As time goes by and claims are validated and settled, the unused portion of the claims pool is released back to the members along with investment income accumulated over the years. The captive offers a host of other benefits that come with owning a responsive, loss-sensitive insurance company, including:

• Ability to select vendors and participate in claim decisions

• Safety programs tailored to the industry

• Ongoing availability of coverage

• Stable, predictable pricing

• Greater control of insurance costs

• Tax deductible premiums

Many staffing businesses have reached the point of accepting loss-sensitive rating plans, and understand the need to participate in effective risk management to overcome the profitdraining effect of workers compensation costs. Many have also participated successfully in bundled staffing rent-a-captives owned by insurance brokers or claim administrators, and believe that an owned, independent, unbundled captive model with a tight knit affinity group - fellow staffing firms - will provide a highly favorable risk and reward proposition.

For Vito Abbruscato, chief executive officer of New Jerseybased Cameo Personnel Systems, the staffing company-owned captive program is "a visionary idea" whose time has come.

"The staffing industry captive was created to do the right thing for the companies it serves - not just increase and collect premiums," Vito observed. "While no one can be shielded from cost increases, as owners, we have a real voice going forward on workers compensation premium issues and can make decisions that contain costs. The icing on the cake is, if we run this captive right, we can generate underwriting profits and investment income that we will all have a share in." FBA

James Rothman is the P0resident of Capital TempFunds, a division of Capital Business Credit. He can be contacted at 954.660.7511, or visit www.capitaltempfunds.com.