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Operating Your Captive as a Profit Center

RISK TO RICHES. RIF007 April 29, 2014 1:45–2:45 p.m. Operating Your Captive as a Profit Center. SCOTT ARNOLD, MS, ARM, SPHR. President, Westmerica Insurance Company Over 27 years at Phil Long Dealerships — CAO Manages insurance operations, risk management, and human resources

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Operating Your Captive as a Profit Center

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  1. RISK TO RICHES RIF007 April 29, 2014 1:45–2:45 p.m. Operating Your Captiveas a Profit Center

  2. SCOTT ARNOLD, MS, ARM, SPHR • President, Westmerica Insurance Company • Over 27 years at Phil Long Dealerships — CAO • Manages insurance operations, risk management, and human resources • Masters in Education; Associate in Risk Management • Director/Risk Management, Westmerica Insurance Company • Over 17 years at Phil Long Dealerships — Risk Mgmt • Experience in auto liability, employment practice liability, and mediation CATHI TRIPPE, ARM, CIC, PHR

  3. WHAT TO EXPECT FROM THIS SESSION • Review traditional benefits of captive insurance • Learn innovative ways to structure a captive • Identify tools to improve the performance of a captive • Define methods to turn a captive into a profit center and tactics to enhance a captive’s bottom line

  4. MONEYBALL

  5. PHIL LONG DEALERSHIPS INC. • Automotive dealership group based in Colorado • Ranked in top 100 Mega Dealers in the U.S. • Been in business since 1945 • Privately owned • Over $620 million in annual sales • 13 locations/25 buildings • 900 employees

  6. WESTMERICA INSURANCE COMPANY • Pure captive domiciled in Colorado • Headquarters in Colorado Springs • Started in 1994 • Over $15 million in assets • 19 shareholders • 5 employees

  7. WESTMERICA MISSION • Reduce losses through effective loss prevention and claims management • Increase profits to our dealerships through lowered insurance premiums and return of premiums to stores with good risk practices — goal to be 10–15% below market • Continue to bring new products and services to our dealerships • Provide non-cumulative 30% of equity return to our shareholders

  8. TRADITIONAL BENEFITS OF A CAPTIVE • Cost savings • Direct access to markets • Greater control — claims management, unbundled service providers, buy insurance when it’s cheap • Improved long-term stability — reinsurer traditionally less volatile

  9. UNEXPECTED BENEFITS OF A CAPTIVE • Power of investment income effect • Ability to build insurance rates • Improved overall business savvy • Cash flow business needs • Provide investment opportunities for key personnel — golden handcuffs

  10. OUR STORY Our Motivation for Going Captive • Problems finding coverage for auto physical damage • Concerns with sky-rocketing Workers’ Compensation premiums • Weary of insurance market controlling our profits • Poor attitude towards risk management

  11. OUR STORY Laying the Foundation of the Captive • Established a foundation of Risk Management practices • Obtained management support for overall best practices • Shifted paradigms — use of company vehicles • Instituted best practices for Workers’ Compensation

  12. CHALLENGES ALONG THE WAY • Fear of the unknown — appetite for risk; aversion to taking on risk • Accountability • Expenses and time away from core business • Raising capital

  13. WESTMERICA — “THE BEGINNING” • 1994 — Risk Phase • $500,000 capital • 11 shareholders • CEO • Corporate Attorney • COO • General Managers • CFO • Risk Manager • Coverage: Workers’ Compensation, auto physical damage, general liability • Consultants/Captive Administrator

  14. WESTMERICA — “THE RESULT” • 2013 — Riches Phase • Assets: $15 million • Liabilities: $3 million • Dividends Paid: $4.3 million • 2013 After-Tax Income: over $1 million • 2014 After-Tax Income: trending over $2 million

  15. CURRENT PRODUCTS • Workers’ Compensation • Auto physical damage — comp and collision • General liability/property • EPLI, fiduciary, crime, pollution • Surety bonds

  16. CURRENT PRODUCTS 2013 Surety Bonds

  17. CURRENT PRODUCTS • Workers’ Compensation • Auto physical damage — comp and collision • General liability/property • EPLI, fiduciary, crime, pollution • Surety bonds • Financial products — Secure Products

  18. CURRENT PRODUCTS 2013 Secure Products • Secure products sold — 13,415 units • Secure product income — $752,898 • Secure Finish • Secure Mark Plus (with Secure ID) • Secure Road • Secure Roadside Plus (with ADR) • Secure Windshield Plus • Smart Payment

  19. CURRENT SERVICES • Risk management • Disaster recovery • My Maintenance Plus administration • Independent insurance agency

  20. FOUNDATION FOR SUCCESS •  Obtain financial involvement by key personnel — raise initial capital • Implement Risk Manager Bonus Pay Plan

  21. RISK MANAGER BONUS PAY PLAN Workers’ Compensation Severity (based on rolling 3-month average) • 0 – 20% • 21% – 30% • 31% – 40% • 41% – 50% • 51% – 60% = $1,500 • = $1,300 • = $1,100 • = $900 • = $700 $270,750 $95,750 35% Premium • Incurred • Loss Ratio

  22. RISK MANAGER BONUS PAY PLAN Workers’ Compensation Frequency • 0% – 0.50% • 0.51% – 0.60% • 0.61% – 0.70% • 0.71% – 0.80% • 0.81% – 1.00% • 1.10% – Up = $1,200 • = $1,000 • = $800 • = $600 • = $400 • = 0 # Claims per month • Total # employees • Claims as percentageof population 6 900 0.6%

  23. RISK MANAGER BONUS PAY PLAN Employment Practice & General Liability Severity (based on rolling 3-month average) • 0 – 15 • 16 – 25 • 26 – 35 • 36 – 45 Loss Ratios = $1,400 • = $1,200 • = $1,000 • = $800 $302,000 $75,200 25% Premium • Incurred • Loss Ratio

  24. FOUNDATION FOR SUCCESS •  Obtain financial involvement by key personnel — raise initial capital •  Implement Risk Manager Bonus Pay Plan •  Unbundle services for better control •  Insure what you can control; transfer the rest (i.e., wind and hail claims) •  Continually identify sources of new revenue

  25. FOUNDATION FOR SUCCESS •  Include risk management expenses in rates •  Pay for results — cost containment, dividend •  Produce monthly financial profit and loss statement — like a profit center •  Meet quarterly with Board of Directors and annually with shareholders •  Follow the 5 “P”s — People, Passion, Process, Product, Profit

  26. CHANGE YOUR GAME • Pull claims history — identify where it makes sense to take risk • Challenge the status quo — “shake it up” • Create a game plan for success • Review current investment strategies • Develop a profit center . . . not just a risk financing strategy

  27. Questions, Final Comments and Contact Information

  28. KEEP THIS SLIDE FOR EVALUATION INFORMATION/MOBILE APP ETC. Please complete the session survey on the RIMS14 mobile application.

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