Archive for January, 2009

Who can you trust?

January 19, 2009

At a time when the nation is being wracked by economic problems its difficult to decide who you can place your trust in.  The very companies that were the pillars of our economic strength have been exposed to reveal that  their foundations have been eaten away by the termites of greed and self dealing.

We can’t just limit our concerns to specific companies either.  Entire industries-of-trust have been impacted.   One of the trust industries that impact our day-to-day lives the most is insurance.  Insurance in particular is an interesting example of a trust relationship.  In exchange for a relatively small premium the insurance company promises to pay subject losses.  It can make this promise because it can figure out how many losses will occur in a particular population of insureds and can charge an appropriate premium to be able to pay for those losses.  Premiums are invested until they are needed to pay losses and at the end of the day a profit is realized.  A symbiotic balance is struck.  Society is served by transferring the risk of loss and stockholders of the insurance company are served because they see a return on their investment.

The breach of trust in the insurance industry is not that the fundamentals have failed us, but rather that they have been ignored.  Management, in many cases, has put aside their responsibilities to stakeholders and have focused on what was best for themselves.

You would think that what is happening to our economy would be a damper to any kind of growth, but that has not been the case in the captive insurance industry.  My consulting practice is an affiliate of USA Risk Group and they reported 13 new captive formations during the month of December alone.  In my practice I am continually fielding questions about how a captive insurance initiative might be helpful for a company’s risk management strategy in the current economic environment.  This may seem inconsistent with what we hear on the news every day, but let me offer some thoughts on why this may be perfectly in sync with our economic woes.

When we are answering the question, “Who can you trust?” the most obvious answer is  you can trust yourself.  Captive insurance is a means of self insurance that allows a company to employ the basics of insurance pricing, claims management and investment control so that they all benefit the company.

Whenever there is a disastrous loss in the insurance market there is always a flurry of new insurance company formations immediately following.  We saw it with Hurricane Andrew, 9/11 and KRW (Hurricanes Katrina, Rita and Wilma).  After each of these events billions of dollars of insurance capacity was created because of the opportunity to compete with insurance companies that had legacy claims issues that they needed to price for.

I think the most recent disaster, albeit man made, is seeing a similar flurry of activity, but this time it will be at the grass roots level.  Companies will be asking the question, “Who can I trust to deliver consistent insurance and risk management services?”  The answer will be, “ourselves”, and the method will be captive insurance.