In Louisiana's grim insurance markets, some companies take the self-insuring route [The Advocate, Baton Rouge, La.]

Jul. 4—One of the largest development firms in New Orleans, whose high-profile projects have included the $530 million Four Seasons Hotel at the foot of Canal Street, has faced some serious "sticker shock" when it comes to its insurance premiums in the last couple years.

But unlike the average resident or mom-and-pop business, Woodward Design + Build has managed to find a self-insurance option that is available only to an elite few.

The company, which employs about 200 people and has annual revenue in the neighborhood of $300 million, recently joined two group captive insurance programs—basically exclusive self-insurance clubs—in an effort to bring its premiums under control.

Corey Lloyd, Woodward's former in-house lawyer, said that when the company ran the numbers to see if joining one of these esoteric programs would be worthwhile, it was a no-brainer: premiums came in up to 50% lower, a massive saving when your annual insurance outlay is well into seven figures.

Members only

The captive insurance idea has been around since 1950, originally conceived as an option only for the largest companies, such as Walmart or Coca-Cola. For these firms, it made financial sense to cut out the middleman and manage their own risks for things like health, property and casualty insurance.

The idea spread to include the group captive, where groups of smaller but still well-funded companies could join together to form their own insurance company.

But even as the idea of group captive programs caught on, it has remained a minority pursuit. The Insurance Information Institute estimates that they account for less than 10% of commercial insurance premiums worldwide and the number of programs in the U.S. has remained constant at about 6,000 for at least a decade.

Still, it is hard to track an industry where most group captives are set up in tax- and regulation-friendly states, like Vermont and Delaware, or offshore tax havens like the Cayman Islands. There is no data available on individual member companies of captive programs, but there is anecdotal evidence that they are catching on in states like Louisiana amid soaring insurance costs.

Priced out

Randy Guillot, president of Triple G Express, Inc., said he joined a captive program just over three years ago because commercial insurance companies were increasingly refusing to cover trucking companies like his at any cost.

Guillot's family firm, based in Old Jefferson, has been around since 1945 and has annual revenue of about $30 million, employing 150 staff and contractors.

He said the litigious environment in south Louisiana—"the stigma from everybody thinking they deserve a big payday from an accident"—had priced Triple G Express out of the market. His firm had also been caught up in the long-running "staged accidents" scams that contributed to soaring premiums for New Orleans area haulage businesses.

Guillot said that his premiums in the captive program have been about 40% below what he paid the year before joining. He's also due another big rebate this year because of his firm's good performance in the first year he joined.

But, he said, the company has had to work for those lower premiums. It has also takes on more risk than it would have with a regular insurance policy.

"The risk is that I'm a part owner and if that captive insurance company does not perform well, if it doesn't rate its members properly, it could be a losing entity," Guillot said. "Then the members have to come up with additional funds to make it right."

It has also meant the firm has had to manage its own claims. If Triple G Express drivers are involved in an accident, the company either tries to resolve it quickly or aggressively resists claims it sees as bogus, Guillot said.

"We do everything we can to mitigate exposure," he said. "I've got cameras on the trucks, boots on the ground. I'm doing that rather than some adjuster 2,000 miles away."

Sherif Ebrahim, a professor at Tulane's Freeman School of Business, said there is no reason, in theory at least, that these self-insurance groups can't proliferate to cover big groups of restaurants, for example, or other such associations.

A complex web

The main risk for companies in group captive programs is that they underestimate the complexity of taking on the risk management job that insurance companies usually provide, he said.

"I'd be worried that where we're going with this it could be really unstable," said Ebrahim. "If the risk is not managed appropriately you can end up where one bad year can completely screw you."

A wider market would mean inherently more risk. If it led to widespread defaults that would defeat the purpose, he noted.

The strength of an individual captive depends on a lot of things, such as the consultant hired to find the right program; Woodward used a Chicago firm called Captive Resources. Also important is the firm hired to assess and manage the risks of the collective, which includes determining each member's premium and whether re-insurance from the commercial market is required.

The performance particularly depends on the long-term commitment of members, said Christopher Knotts, a Bossier City-based insurance agent at Higginbotham who specializes in group captive programs.

"I think of it like a church where a group of patrons pay tithes to ensure its long-term stability, except it's for a group of truckers, for example" Knotts said.

Long-term play

The level of commitment likely explains the relatively slow adoption.

"It's not a product that every company is willing to consider or is eligible for," said Lloyd.

He said group captives are best seen not as a silver bullet to deal with the current insurance crisis but as something that stabilizes costs for the long haul.

"Joining the captive for Woodward was less about us reducing our cost as it was about substantially reducing future increases," he said. "It gave us more control."

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