Captive Market: As Commissions Get Smaller, An Overlooked Product Might Assume A Larger Role.
Captives are old news…or are they?
The insurance industry has been changing dramatically with corresponding rapid changes in distribution channels. Insurance companies that previously had been agency -only sellers are now selling directly to consumers and vice versa, pricing and competition has intensified and the market as a whole has been soft for several years. The result? Decreasing commission income and shrinking profit-sharing.
The underlying causes of insurance market volatility—economic uncertainty, changing consumer demographics and regulatory escalations—don’t seem to be going away any time soon. As a result, carriers and producers have had to continually challenge their business approach. That’s why, agents and brokers, it is time to take another look (or a first look) at captives.
Insurance captives have been around for more than 50 years. But they have new relevance as competition causes insurance marketplace participants to think outside the box and come up with creative ways to differentiate themselves. In basic terms, a captive is an insurance entity formed to provide insurance to its owners—in other words, a form of self-insurance. With a captive, the owner retains some of its risk internally and retains profits associated with underwriting the risk.
Captives are complex and not for everyone, but they can have significant benefits for those with the right set of circumstances. Complexity offers an advantage to insurance producers who can offer captive solutions and expertise in the captive arena to their clients.
Captives can have benefits for agents and brokers. Agency captives can create profits in excess of traditional profit-sharing agreements by allowing agents to participate in the underwriting and investment profits for businesses for which they are experts. That’s especially true when that book of business has a known history of profitability for the carrier. Establishing of an agency captive also allows for added control over the agency-carrier relationship and can result in long-term stable profitability, in contrast to the profitability fluctuations typically associated with alternating soft and hard markets. For smaller agencies, group agency captives can allow groups of agents to pool resources in forming a captive. For brokers, captives once were only available to very large entities. However, recently introduced captive structures and tax law modifications have led to medium and smaller companies taking a look at captives to insure at least a portion of their risks and thereby expanding sources of insurance for the clients of many brokers.
Brokers can enhance their profitability and improve client relationships by offering services relating to captives such as exploring the benefits of a captive; analyzing risk to determine which are best served by a captive, and which should be placed in traditional markets; placing of reinsurance coverage for the captive; and helping to design the captive framework. Brokers can also establish their own captives, which operate similarly to agency captives.
For agents and brokers, captives can provide additional control, enhanced profitability, a hedge against hardening markets, access to reinsurance markets, tailoring of insurance products to meet client needs, coverage for hard-to-place risks and improved client relationships. Rather than seeing captives as a threat to existing revenue sources, producers should see captives as another selling tool and a way to expand services and revenue.
In order to remain competitive, producers need to increase their understanding and awareness of captives and offer captives as an alternative to their clients.