The goal of this article is to help all Dunkin’ franchisees gain clarity on the subject of captive insurance programs and provide basic knowledge on just how a captive program could benefit their business performance and profitability.
What is a captive?
A captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owners (example: a group of Dunkin’ Donuts franchisees could form a captive). Captives are a form of self-insurance (with full reinsurance protection) where the insurer is owned wholly by the insureds. They are typically established to meet the risk management and insurance needs of its owners or members.
One of the main reasons businesses form a captive program is to earn underwriting profits and investment income based on the performance of their individual company. Because members have the potential to earn underwriting profits and investment income, participation in a captive insurance program is viewed as one way to transform the insurance expense line of a P&L into a profit source.
History of Captives
The term “captive” was coined by Fred Reiss, known as the father of captive insurance, when he formed American Risk Management in 1958. During this time, U.S. regulations made it too expensive to form and operate captives in the states. Reiss looked offshore and formed the first modern day captive in Bermuda in 1962. By the end of the 1960’s there were over 100 captives formed, with Bermuda and the Cayman Islands being the leading domiciles.
By 1978, Bermuda established the first comprehensive legislation, licensing and oversight procedures for the captive industry. The growth trend continued and by the 1980’s there were about 1,000 captives.
Today there are over 7,000 captives operating in the world with more than $10 billion in annual premiums. Bermuda is still the largest domicile, with over 900 captives. And, as a result of a more favorable regulatory environment, there are now over 2,000 captives domiciled in over 30 U.S. states. The fastest growing segment of captives is within mid-sized companies which used Group Captives. At the same time, over 90% of Fortune 500 companies now own captives.
A Success Story: the Restaurant Franchise Captive Program
The Restaurant Franchise Captive Program (RFCP), an exclusive program of York Risk Services Group, is an excellent example of a group captive that was formed for the benefit of restaurant franchisees. This program began in the midst of California’s “hard market” in 2004, at a time when workers’ compensation insurance rates were skyrocketing and many businesses failed or left the state.
Two franchisees – one a Carl’s Jr. and the other a Denny’s – partnered to start the RFCP and began writing insurance business on July 1, 2004. The primary goal of this venture was to gain control of their own insurance costs. By getting access to claims management and embracing safety services, these two franchisees were able to drive the cost of their workers’ compensation, general liability and property insurance down to the lowest level they’d ever experienced. In the 11 years since inception, the RFCP has delivered:
• A successful, growing captive insurance program with over $15 million in annual premiums
• $10.4 million in underwriting returns to members
• Historical loss ratios of 30 percent compared to 55-60 percent industry norms (this is the ratio of claims costs to premiums paid, so lower is better)
• Over 1,500 locations in over 30 U.S. states
• Over 20 restaurant brands insured in the program
A Captive Program that Exceeded all Expectations
The RFCP program has more than exceeded the expectations of its members when first formed in 2004. Thanks to the efforts of members working with their program manager and broker to manage claims and safety issues, members have received millions of dollars in underwriting profits, turning a business expense into a profit center.
A founding member of the RFCP told us, “Getting into the RFCP was one of the best decisions I’ve made as a business owner. I have been in the program since its start in 2004, and the RFCP has done more to enhance my profitability than any other single thing I could have done.”
Among the benefits to franchise owners:
• Underwriting Profits that directly enhance your company’s profitability
• A market-competitive insurance rate
• Superior Safety and Claims Management Services that reduce your claims frequency and drive costs to the lowest possible level
• Comprehensive coverage designed to meet the insurance requirements of your franchisor (for Workers’ Compensation, General Liability, Property & Auto Coverage)
• Full insurance and reinsurance protection from an “A” Rated insurance carrier
• Greater control and say in how your claims are managed
• The lowest net cost for insurance, which provides a competitive advantage in the franchisee marketplace
Captives are the fastest growing segment of the commercial insurance marketplace. Chances are a captive could be a good fit for your company and satisfy your insurance needs. For many franchisees, a captive program would provide a greater degree of control over insurance costs while also providing a welcome new profit stream. •
Everett Newman, Jr, CIC. is the managing vice president for York Alternative Risk Solutions