T he significant growth in group captives has created a rapidly changing landscape that is directed at middle market accounts with better-than-average loss profiles that are willing to

assume some of their own risks (i.e., have skin in the game) in order to reduce their overall costs.

In order to successfully implement a group captive (e.g., group or association captives, protected cell captives, agency captives, risk retention groups, etc.), the partici-pants must have similar risk-financing goals and methods for achieving those goals. Also needed are a variety of outsourced, specialized service providers that implement the captive’s day-to-day operations. While it is difficult to determine just which providers are needed most, one of the most critical is the third-party administrator (TPA) which is charged with daily claims handling. It is important that the TPA’s operational experience matches up with the goals of the captive and understands the risks covered.

Many of the daily activities are similar to those of a traditional insurance carrier. However, there are also some important differences, notes William Chapman, senior vice president of Gallagher Bassett’s (GB) Captive Practice Group. By far one of the biggest and most important differ-ences is the actual claims management. Under traditional coverage, the insured has little input, since it is the carrier that has money at risk. Given this situation, insureds are minimally involved in the claims settlement process. That is one of the biggest areas of difference, Chapman notes. “Captive owners have much more control of the various claims-related activities. Gallagher Bassett’s approach is that we encourage the captive owners’ involvement through the entire claims process,” he says.

There are no universal or standardized operating pro-cedures specifically designed for captives. As a result, most TPAs have established their own procedures to monitor the success of a captive program, with one of the most impor-tant being a reduction in claims caseloads when compared with a traditional insurer. In order to provide sufficient

CICA SPECIAL SECTION

TPAs AND CAPTIVES

“We are able to provide more customization for our captive clients than they can get from the traditional carriers.”

—Amy O’BrienNational Sales Director of Alternative Risk Programs and Specialty Markets

Gallagher Bassett

A critical component for captive insurance company success

Reprinted from the February 2016 issue of Rough Notes Magazine

time to handle claims, some TPAs have reduced the inventory of open claims so that they can provide claims management as part of an integrated service model. For example, accord-ing to Chapman, GB’s captive clients normally have a claims inventory for workers compensation and auto liabil-ity that range from 10% to 15% less than a traditional carrier’s caseload.

Chapman points out that another important distinction between cap-tives and traditional insurance carriers involves the choice of legal counsel. “The increased input insured members have extends to selection of

approach that captives embrace to con-trol and mitigate loss. It appears that this consultative approach is quite effective, so it is important that agents who are utilizing the captive market for their best clients, select TPAs that are able to meet or exceed their clients’ claims management expectations and can provide innovative solutions to claims management issues. n

legal counsel. Members are able to be involved in the selection of counsel in concert with the fronting carrier.”

Typically, the agreement concern-ing legal counsel and other matters is spelled out in the service instructions or special handling requirements, notes Amy O’Brien, national sales director of alternative risk programs and specialty markets for GB. “We are able to provide more customiza-tion for our captive clients than they can get from the traditional carri-ers.” Chapman states that the service instructions provide a “roadmap” of how a claims adjuster manages the day-to-day claims activity. Other important features include control of certain aspects of medical and other legal service providers. Typically, these services are provided by the TPA through a dedicated service team.

The cost of claims accounts for the largest portion of all premium dol-lars paid into a captive. So, it is easy to see why claims management is one of the most important features of any risk-funding approach. This becomes even more important to the success of a captive, since the owners have their own money at risk and, as a result, are looking for ways to reduce over-all costs. Thus, captives proactively develop and implement integrated pro-grams that reduce overall claims costs as well as establish loss prevention and mitigation programs.

As Gordon Padera, executive vice president of GB’s Consultative Division, points out, “Control is typically one of the key reasons why corporations are interested in captives. The captive’s TPA is there to assist the owners in having a hand in controlling their own destiny.” He goes on to add that captive owners are “fully engaged and looking to develop a long-term relationship with their various service providers to assist in the prevention of injury and occupational disease.”

In order to obtain the desired effects of captive ownership, care must be taken in the selection of all service providers, especially the TPA. The important role played by claims management professionals is key to a successful captive formation. Now that recent studies confirm that the alternative risk transfer market pro-vides better long-term results than the traditional marketplace for good risks, further growth of captives can be expected.

GB notes that it continues to see significant growth potential from captive insurers. Gallagher Bassett’s consultative approach that blends claims management with risk control, goes hand in hand with the progressive

“Control is typically one of the

key reasons why corporations are

interested in captives. The captive’s TPA is there to assist the owners in having a hand in controlling their own destiny.”

—Gordon PaderaExecutive Vice President—Consultative

DivisionGallagher Bassett

“Captive owners have much more control of the

various claims-related activities. Gallagher Bassett’s approach

is that we encourage the captive owners’

involvement through the entire claims

process.”—William Chapman

Senior Vice PresidentGallagher Bassett

Michael J. Moody, MBA, ARM, is the author of the articles in the CICA special section.