Risk Selection- The Smelt Dip Dynamic

August 20, 2008

First, let me offer my apologies for such a long time between posts.  No Excuses!

If you have never stood in freezing cold water up to your waist in the wee hours of the morning waiting for smelt to run you are much more sane than I!  I went to college in the Upper Peninsula of Michigan and smelt dipping is a tradition for the locals there.  Every night, just after the ice melts on Lake Superior, small sardine-like fish called rainbow smelt run up into the streams connected to the lake in the millions (yes millions).  When you stand in the middle of these streams in your waders you can literally feel them banging against your legs in waves.

You catch these fish by using a 5 gallon plastic barrel with the bottom cut out and replaced with screen mesh.  The size of the gaps in the mesh is important because if its too small you catch too many fish that you can’t use.  If its too big you only get a small number of the biggest fish.  There is a dynamic that needs to balanced to catch enough fish to make it worthwhile to stand all night long in freezing water but not too many really small worthless fish.  Now, here is the insurance part of all this….Insurance companies have to balance this “Smelt Dip Dynamic” as they make decisions about risk selection.

One of the most critical issues associated with the profitability of any insurance program, captive or traditional, is the selection of the participating risks in the group of insureds.  How you set the criteria for selection determines the quality of risk and the number of risks that might qualify.  This decision process has a lot of moving parts. Insurance theory has several, often competing, criteria that all come together to form the operational characteristics of an insurance company.  On one hand the theory of large numbers says that you have to have a lot if risk units mixed together in order to have predictable loss results.  On the other hand we know that some risk units just don’t have the loss control characteristics that make them good risks.

One approach to risk selection would be to accept only a very exclusive group made up of accounts representing the very best loss ratios.  This might work if you have a large enough group of acceptable risks in the group.  Beside the statistical shortcomings of a small group of insureds there are the fixed costs of an insurance program that must be covered as one of the expenses of the program.  In order to cover costs and alleviate some of the statistical problems of a small group we would have to raise prices but then these excellent risks might be able to go somewhere else and get a better price.

Another approach would be to take all comers and build a very large risk group that would have very predictable statistical performance but because there were no criteria to entry would end up with some very bad players in the pool.  The experience of the good loss performers would offset the cost of the poorer performers but the overall premiums would have to be higher to compensate for the bad risks.  Again, good risk could find a cheaper deal and the bad risk wouldn’t be able to find a better price anywhere.  The result, adverse selection.

Enter “The Smelt Dip Dynamic”.  Imagine that the risk selection criteria is correlated to the size of the mesh in the bottom of our 5 gallon plastic barrel.  It needs to be wide enough to let the very bad accounts flow through without being captured, but small enough to catch enough good fish to make the process worthwhile, both from a cost perspective and from a statistical perspective.

Captives differ from traditional insurance programs in how they determine how big to make the mesh.  Because captive participants are typically larger accounts that take a significant share of frequency layer losses they already have a larger statistical base to predict losses on.  Captives also have a lower expense load than a traditional insurer so there is less cost that has to be distributed in the program.  The end result is that a captive can pick and choose the very best risk to be a participant in the program and still maintain a reasonable degree of statistical credibility.

In our analogy, captives are only after the biggest and best fish they can find and they set their underwriting criteria to ensure that happens.


Archimedes had it Right!

July 1, 2008

Archimedes, a Greek mathematician c. 250 BC, was the first to explain the principle of the lever explaining how a large weight could be lifted by a relatively small weight by the use of a rigid lever and a properly positioned fulcrum.  The process was called leverage.  Archimedes, recognizing the power of leverage was quoted as saying, “Give me a place to stand and with a lever I will move the whole world.”

Well, the concept of leverage has made its way into our world in many ways, mechanical and conceptual.  Insurance companies use a form of financial leverage in order to conduct their day-to-day businesses.  In exchange for a relatively small premium someone with risk can insure against the loss involved with that risk by utilizing insurance.   In this example the insurance company is the lever, the fulcrum is the degree of risk, the premium is the smaller weight doing the work and the weight being lifted is the loss potential.  Depending on how risky the deal is determines where the fulcrum is placed which determines how much premium needs to be applied to “lift” the weight of the potential loss payment.

Leverage is used within the insurance company as well.  Insurance companies would be very inefficient risk takers if they had to maintain a dollar of surplus for every dollar of risk they assume.  Instead, insurance companies are allowed to leverage their surplus to allow for a multiple of premium to be written.  Just how much “leverage” can be applied is a matter of prudent financial planning and in most cases is limited by regulatory action in their chosen domicile and the review and comment of rating companies like AM Best.

Most traditional US companies are limited to a 2:1 Premium to Surplus ratio.  Much more than 2:1 leverage and the insurer’s financial wherewithal is questioned.  Granted, based on the types of coverage and the clientele of traditional insurers that is probably a good leverage ratio.  Regulators want to protect the unsophisticated insurance buying public.  But when you enter the realm of sophisticated risk-managed large deductible insurance buyers these protections are much less necessary, but still imposed.

Captive insurance arrangements typically allow for higher leverage ratios depending on the domicile for the risk.  Some domiciles apply risk-based analysis  in order to determine Premium to Surplus ratios and often are in the 3:1 or higher range.  Other domiciles have prescribed Premium:Surplus ratios up to 5:1.

If part of the cost of insurance involves a charge for the surplus tied up to write a coverage, which mechanism would provide the most efficient, less costly surplus charge?  Obviously the one that allowed for the most leverage, a captive insurance product.  If you combine this with the fact that a captive typically assumes the higher frequency layer of insurance costs which represent about 60% of the loss funding in an insurance program the magnitude of capital tied up to support risk can be dramatically reduced in a captive.

Archimedes had it right.  Give me a captive insurance company and a good domicile and I’ll cover the risk of the world!


Cedar Consulting LLC to offer Virtual University of Online CE Courses

June 23, 2008


This is great news for those who are interested in earning their required Continuing Education requirements for their Property and Casualty and Life and Health Insurance licenses as well as CPE for Certified Public Accountants.  In conjunction with 360training.com, a recognized leader in professional education delivered in an online environment, we are now able to deliver a large catalog of insurance and accountancy courses. 

Not only is the coursework approved to meet the annual and bi-annual continuing education requirements in every state, it does so in a cost effective and convenient way.  Online education saves you time and money.  You can take classes whenever and wherever you want and with a large library of available course titles you are investing your time in something constructive; learning and not just doing time to finish your requirements.

Cedar is currently developing coursework for Captive Insurance, Risk Purchasing and Risk Retention Groups topics.  In the very near future we will have these courses available through its Virtual University, fully approved for CE credit in all the states.

Cedar Consulting’s Virtual University can be found online at http://cedarconsulting.360training.com 

Bermuda Captive Conference- Cedar/USA Risk Group Announcment

June 17, 2008

All this week the captive community has descended on the Southampton Princess for the Bermuda Captive Conference.  In its fourth year now the conference is well attended with about 500 captive professionals.   The conference includes a specific track for Healthcare captive issues which is curious since for many years Bermuda neglected this market segment, essentially putting Cayman into the healthcare captive business.  Perhaps this is an indication that Bermuda is now welcoming this segment into the ranks of the largest global captive domicile with nearly $30B in captive insurance and reinsurance premium during 2007.

My own company, Cedar Management Limited and Cedar Consulting LLC had a big announcement just before the beginning of the conference.  We have reached agreement with USA Risk Group, Burlington, VT for them to purchase a controlling interest in our companies.  The original partners of Cedar will retain a significant ownership percentage and the companies will continue to trade in the US and Bermuda under the Cedar name.  We are very excited about the opportunities that this presents for our company and our clients.

More news from Bermuda to come over the next few days. 


Timing is Everything

June 13, 2008

Go West Young Man

Rocky Mountains, 1957

When the topic of alternative risk transfer programs comes up in conversation I am politely reminded by the other party that we are in the midst of a soft market and now is not the time to be dragging all that captive stuff out for clients who aren’t feeling any insurance pain.  After all, captives are the stuff of hard markets. 

The Story

Let me beg to differ by telling a little story from my past.  Let me say that this story is the substance of serious family lore.   Outside of weddings and reunions the whole story has never been told, up until today.  While I was a participant in the events I have had to rely on my father for the details.  He was quite a story teller so the exact facts may have been stretched a bit, although my mother, who often corrected the exaggerated details of my father’s tall tales, had little to say about this story in particular.   They have both passed on so the details are now etched in stone.

I grew up an Air Force brat and for those of you that have never been in a military family what that means is that your life is turned upside down every couple of years as you move from one base to another.  I learned this lesson at a very young age when we were transferred from my birthplace of Loring AFB in Limestone Maine to Clark Field in the Philippine Islands.  My father was to fly from Sacramento to Manila to report for duty while my mother and I were to follow by Navy ship from San Francisco (that’s another story!).   It was the spring of 1957 and we packed up the 1952 Mercury Monterrey and started the Maine to California trek.  Remember, this was long before most of the Interstate Highway system as we know it was completed.  This was the Ultimate Road Trip.

The weather during our cross country trip was unseasonable warm and while the Monterrey was a comfortable ride with a powerful 8 cylinder engine it did not have air conditioning.  After several days on the road I wasn’t feeling too well and the hot car ride just wasn’t helping.  Remember, this is 1957 and that means cloth diapers.  You know, the kind you save in a bag and then wash and reuse.  Let your imagination wander a bit here.  Hot car, sick baby, soiled cloth diapers piling up in a bag.

My father was not a patient man, and even less so as the day went on.  Somewhere in the mountains of Colorado on a twisting and turning section of road he reached his limit.  “Get rid of those dirty diapers”, he boomed.  “What do you want me to do with them?”, asked my mother.  “I don’t care, throw them out the window, just get rid of them!”  My mother reached into the bag and grabbed the worst offenders and rolled down the window.  My father, looking in the rear-view mirror said, “OK, toss them.” and just as my mother’s fingers lost their grip on the rolled up cloth he yelled, “STOP!”.  A car had come round the bend right behind us and my father watched in horror as the dirty diapers hit the windshield of the car and stuck there.  The shocked driver turned on his wipers, making matters worse as the diaper, apparently hung up on the wiper, smeared its contents across the windshield.  Timing is everything!

My father pulled the overdrive lever on the Mercury and we sped away as quickly as he could negotiate the curves and didn’t stop until we reached that night’s motel.  I am convinced that somewhere in the world there is a reciprocal story being told around the tables of family gatherings about the day some lunatic with Maine plates nearly caused grandpa to drive off the road when a dirty diaper hit his car!  What a day it would be to meet that person!

Timing is everything!

So the point of this story, other than perhaps to make you smile, is that timing is everything.  If we wait until a hard market to pull out the hard market solutions, then its really too late.  If hard markets were like hurricanes, tornadoes or dirty diapers (we know they happen but not when and where) then we could be satisfied with a reactionary solution, but history tells us that insurance pricing moves in a cycle, its predictable, and we know that while in the depths of a soft market is exactly when we need to be making plans for the next hard market. 

If you are a risk manager or an agent/broker, don’t get enamored with the insurance market pricing and conditions you have today.  Take advantage of them, but at least look to the future and decide how you will handle the changes that we know are sure to come and then put into action a plan to start to develop those solutions today.   A captive insurance initiative may be the solution you need.

Captives and Flight School

June 6, 2008



Cedar Air



This is your intrepid blogger preparing for yet another death defying trip into the ether in pursuit of his private pilot’s certificate.  I’m really close to finishing my studies and hopefully will be taking my “checkride” in the next few weeks.  Flying has some curious similarities to putting together a captive insurance initiative. (I know, everything has to relate to captives!)

Preflight  Advanced planning of the route of travel, the landmarks along the way, the physical conditions at the destination airport typically occur hours, even days, in advance of even showing up at the airport.  During the preflight preparation a pilot has to secure information relative to the environment that the flight will be conducted in.  Weather is an obvious factor, but that considers much more than just rain, clouds and storms.  Barometric pressure, wind speed and direction and temperatures all play a major role in flight planning.  Next comes a systems check of the aircraft.  Everything is inspected in detail to try and mitigate any in-flight conditions that would be dangerous because of a systems failure.  In order to successfully plan a captive insurance initiative we have to understand where we are trying to go and the environment in which we will be operating in so that contingencies can be planned and a go/no go decision can be made with confidence.  Planning is paramount to a successful flight as well as a successful captive launch.

Engine Start and Final Checklist  Once the engine in a small aircraft is started all the flight systems are checked again to make sure that they operate correctly from within the cockpit.  The engine function is checked at various power settings and configurations to make sure it will operate as expected during all the phases of flight.  Finally, you sit at the end of the runway, apply power and then utilize all the “stick and rudder” skills you have acquired to make the plane fly.  Once the design work of a captive is completed it is time to launch it and to start to conduct business with it.  This doesn’t happen on “auto-pilot”, it has to be watched and skillfully monitored as it takes flight.

Check points and Map References   As we turn to the compass heading we planned for to reach our destination we have laid out our course on a map that shows ground features that we can spot from the air to verify we are on course.  Planned in advance of flying we know how long it will take us to reach each of these checkpoints based on wind speed and direction.  Often things don’t turn out exactly as planned and it is necessary to adjust heading directions and power settings in order to stay on track to the destination.  In a captive initiative it is important to have the plan laid out carefully, but it is just as important to monitor progress and make adjustments as the program matures.  This is a step that so many captives fail to take.  A captive insurance program operates in a dynamic environment and that environment must always be compensated for.  Think about driving a car on a well marked highway versus flying a plane in three dimensional space with no “rumble strip” when you get off course!

Arrival at Destination  Assuming that you have been paying attention to all the details up until this point you should arrive at your destination on time, with plenty of fuel to spare and with confidence in your knowledge of the conditions you will  encounter when you get.  Its only because of careful planning, attention to detail and the adjustments made en route that you reached the destination in the first place.  A successful captive insurance initiate reaches its planned destination in the same way.  Monitoring the progress in relationship to the plan helps the captive manager and owner make tweaks to the program that will help the captive arrive at its planned goal.

So often I come across captive insurance programs that that are “off the shelf” cookie cutter solutions to general insurance problems.  In a static world they are sufficient solutions to single issue insurance buyers.  They work a lot like a AAA road trip map.  As long as you don’t encounter any difficulties or detours along the way you should be able to reach your destination.  That’s not the current business or insurance environment however.  Change is measured by the hour in some segments and it is critically important that a captive be designed to be able to change along with the environment.

Good planning, execution and monitoring and feedback will lead to a successful flight as well as a successful captive insurance program.


Mad Science or Insurance Laboratory

May 13, 2008

There are so many creative uses for captive insurance initiatives that sometimes its hard to tell whether Mad Science is at work.  In fact, just the use of the word “creative” can give your tax advisers the heeby jeeby’s.

Mad Scientist at Work
(Public Domain Image from Dr. Cyclops (1940))

Captive Insurance programs can help to solve many risk financing problems for an organization.   In fact, one of the primary reasons to utilize a captive is to provide financing for risk that the traditional insurance marketplace is either unable to provide at a reasonable cost or unwilling to provide at all.  Depending on the circumstances many otherwise traditional risk portfolios have found themselves in this position. Among them medical malpractice, trucker’s auto liability, aviation risk and products liability.  In each situation these risk portfolios have been able to turn to an alternative risk financing mechanism in order to find coverage.

Another area of risk that can find a refuge in a captive insurance initiative is risk that is specific to a company’s operational characteristics.  Known as Enterprise Risk Management (ERM) this school of thought identifies the risks associated with accomplishing the strategic goals of a business, assigns a cost to that risk and then identifies how best to mitigate the risk.  Part of the risk mitigation plan may include transferring a part of that risk to a captive insurance company owned by the parent company.  An example of ERM for a global manufacturing and sales company might be currency fluctuations.  A captive may be able to mitigate that risk for the company and help to smooth out the earnings stream, benefiting the investment stability of the company as well as aiding in planning purposes.

As a final thought, a captive that is successful in helping its parent accomplish its own risk financing goals may be beneficial to that companies upstream and downstream stakeholders.  By that I mean a captive may be able to help its parent company’s vendors and clients by applying the same risk solutions to them as it does for its parent.  By helping to solve their common risk problems the parent gets the benefit of “third party” risk that helps to achieve tax efficiency for the captive as well as benefiting its partners in the distribution chain.

Bermuda has long been know as the “World’s Insurance Laboratory” and for good cause.  It has served as the innovation incubator for many insurance practices that are now common place in the industry.  Fortunately, innovation in the captive insurance market is never ending and will continue to move the entire market forward through the innovation of its “mad scientists”.

As always, please feel free to post your comments here.  If you would like to contact me directly you can reach me by email at dennis.silvia@cedarconsulting.net

Independent Captive Operational Reviews

May 9, 2008

I was recently interviewed by Michael Moody of Rough Notes Magazine regarding a consulting engagement that I did for Milestone Insurance Company, a Bermuda heterogeneous group captive.  Here is the link to the full article in the on-line version of Rough Notes: http://www.roughnotes.com/rnmagazine/2008/may08/05p072.htm

I am a firm believer that a captive should undergo a periodic review from an independent consultant in order to make sure that they are operating with maximum efficiency and taking advantage of every opportunity that a captive mechanism can provide.  In the case of Milestone, Catherine Duffin and the folks at Artex have done an excellent job in managing the costs of the program and providing a very stable insurance platform for the members of that group.

But what can a review do besides just provide a scorecard for the current service providers?

Lets look at some potential results from a captive program review:

  • When there are changes in risk management personnel the folks who championed and understood the captive may be the ones leaving the organization.  The corporate owner of the captive could be faced with owning a sophisticated insurance mechanism that could solve numerous and ongoing strategic risk financing problems but no one that understands it well enough to really use it to its potential.  Sort of like having a Maserati in the garage and no one with a driver’s license.
  • Things change in the business and regulatory environment.  Employee benefits in a captive may not have even been available as an option when the captive was formed.  Certainly things have changed in the business world including possible ownership changes, global initiatives and new products.  A review can help to identify what new opportunities might exist for the captive that could support the owner from both a risk financing perspective and as an overall growth strategy.
  • Third Party liability options in a single parent captive are often the holy grail of reaching favorable tax treatment for the parent’s premiums in the program.  The problem with third party liabilities is just that, they represent someone else’s risk and if you aren’t careful about it you can get burned.  Captive reviews often turn up third party risk assumption potentials in upstream and downstream stakeholders.  Vendors and clients who share common industry characteristics often have the same risk management issues and you’ve already learned how to do with them in your captive.  It is a natural related, albeit third party, risk.
  • Sometimes a captive has just outlived its usefulness and it needs to be shut down.   This is particularly true when the primary motivation for starting the captive was a short term premium savings or some type of tax play.

If you a captive owner or a broker that is responsible for a captive for your client I think there is a lot of value in performing a review of the captive’s operation and its potentials in the current market environment.   If you are interested in discussing this more please email me at dennis.silvia@cedarconsulting.net or call me at 440.264.9992.


Mind the Gap

April 29, 2008

IMG00078-20090825-0716 (150)

Last spring my wife and I travelled to London with our eldest son and his wife.  We absolutely loved the week that we spent exploring the city and did most of our explorations via the Tube.  The Underground is itself a destination I think.  Descending into the deep tunnels reminded me of all those old WWII movies with the population of London huddled safely underground while the city above exploded and burned from air raids.   I laughed the first time I heard the very British recorded message, “Mind the Gap” as we came into the station on our first Underground sortie.

Playing the recorded message began in 1969 when it became obvious that the driver’s warnings were ineffective in preventing accidents involving twisted ankles and broken bones.   The announcement is a cultural icon now and you can find souvenirs with the logo all over London.

There is gap that needs to be minded in captive insurance programs as well.

Any insurance company must maintain capital in order to conduct its insurance business.  The amount of capital in an insurance company limits the amount of premiums that can be written depending on the insurance company’s domicile, type of business written and business structure.  Generally traditional US insurers are required to maintain Premium to Surplus ratios of 1.5:1 to 2:1.  For these companies that provide general commercial and personal lines insurance, a ratio much beyond 2:1 is highly scrutinized by regulators and review agencies alike.

When an insurance company reinsures a portion of its risk it is allowed to take a credit for that portion of the premium it reinsures against its Premium to Surplus ratios provided the reinsurance company is authorized by the regulators.  In other words, the reinsured premium doesn’t “use up” any surplus and allows the insurance company to write more business and still maintain acceptable leverage ratios.  When that same company reinsures risk to a captive insurance company, an unauthorized reinsurer, it must get a guarantee from the captive in order to take the surplus ratio credit.  This guarantee is typically in the form of a Letter of Credit or a 114 Trust account roughly equal to the amount of the premium ceded to the captive.  As long as the collateral is in an allowable form the front company can take their credit, write additional business and preserve their leverage ratios.

The front company also assumes a credit risk from the captive reinsurer in that losses may exceed the amount of money available to pay those losses.  Since the front company is responsible for the payment of claims and is reimbursed by the reinsurer after the claim is paid, there is a potential that the front company might not get reimbursed.  In order to control this exposure, the front company may add a reinsurance feature to the program called Aggregate Stop Loss.  This coverage comes into effect when losses in a program reach a predetermined level and results in any additional losses being paid by the front company.  Typically the attachment point is a multiplier of the loss pick and ranges between 165% and 200%.   The difference between what is funded for losses in the premium and the maximum amount of losses that might be paid by the captive is called “the Gap”.  It is essentially the risk that the owner of the captive assumes, above and beyond the premium paid, for losses in the program.

In order to mitigate the “credit risk” that the gap presents to the front company it is not unusual for some portion of the gap to be collateralized.  Typically the front company evaluates the financial ability of the captive and makes a determination of how much collateral is required.  This might vary anywhere from just collateralizing the ceded loss funds all the way up to collateral equal to the aggregate stop loss attachment point.

You must “mind the gap” in the sense that to collateralize this exposure may take as much as another 50% of the original payin premium to secure.  It might be argued that this collateral quantifies the upside risk potential in a captive insurance initiative, but at the same time it represents a significant cash flow event in the face of already having to fund the creation and capitalization of a captive.

Pro Forma analysis in the initial stages of a captive’s formation should take the need for gap collateral into consideration and can help to mitigate its impact by proper planning.  Aggresive negotiations with the front company’s involved will also help to structure a collateral scheme that benefits all the parties involved.

Choosing your consulting and management partners carefully when considering a captive insurance program is critical.  If we can be of any assistance in helping you understand the benefits and challenges of a program for your company, let us know.  dennis.silvia@cedarconsulting.net

Captive Insurance- Only for the Hard Market?

April 23, 2008

I have to offer my apologies if you are a regular visitor to my blog.  I haven’t been able to post in the last few weeks because frankly I have been so busy with my work with clients.  I don’t offer this as an excuse, and it certainly isn’t a complaint, but I think it is interesting to note that in spite of a soft market, captive insurance initiatives continue to be front and center in the minds of commercial insurance buyers.

I think there are two reasons why the soft market hasn’t put a damper on new captive insurance program development.  First, I think there are several very compelling reasons to use captive insurance mechanisms to manage risk financing that are not cost-related.   Second, I think the current generation of risk management professionals remembers what a hard market looked like and they know that insurance is cyclical.  Let’s investigate these two factors separately.

Too often captive insurance mechanisms are marketed on the basis of reducing premium or as a tax play.  OK, sometimes they can do either or both, but those two advantages are typically short-lived.  Cost related advantages are real, but they are not the only, or the best, reasons to use a captive insurance mechanism.  The market swings soft and all of a sudden traditional insurance prices beat captive insurance prices in the short run or the IRS catches up with a tax loop hole and closes it up tighter than spandex on an overweight body.  If an insurance client is purchasing their insurance on a year-to-year tactical basis then they will live and die by the pricing sword.  What most professional insurance buyers have come to realize is that over a ten year horizon they will end up paying for their own frequency layer losses, a share of the severity losses and the expenses associated with policy and claims administration.  The real question for them is how do they want to pay for it.  Alternative risk mechanisms typically offer much more stable pricing over the course of a typical insurance market cycle.  Relationships are personal with reinsurance support so a company is less likely to be subject to being the “baby tossed out with the bath water” if they are in a tough risk segment but are a better than average player.  You know what I mean, the industry knee jerks on trucking companies for instance and all of a sudden decides that they don’t want to write them, any of them, and the pricing jumps for those few insurance companies that continue to write the risk.  Sometimes specific coverage or specialized forms are available nowhere else but in a captive setting (think abuse and molestation for religious or social service organizations).

The cyclical nature of the insurance industry makes for a very compelling strategic reason to be involved in an alternative risk mechanism.  Rather than being subjected to roller coaster pricing, captive participants see a more stable pricing base.  Are the lows as low?  No, but niether are the highs as high.  This makes for a better financial planning environment.   

In my opinion many insurance companies run their businesses by looking in the rear view mirror.  Its not surprising.  They price their current business by watching their historic losses, they invest long into the future for maximum potential return.  The problem is that losses happen in the here and now and insurance companies often get caught holding the dirty end of the stick between historic loss performance and future investment performance being worse than projected.  Once they see themselves heading for the ditch they have to react quickly and this more than often ends up as knee jerk pricing and market service decisions.  At the end of the day the insurance buyer ends up paying the price. 

I think the experience of the risk management community coupled with the availability of captive insurance initiatives to the middle market insurance buyer is driving the current rush to control costs through alternative risk mechanisms.  Knowing that behind every soft market is a looming hard market, risk managers are positioning themselves to avoid the next hard cycle.  Considering that there is a development period of between 6 and 12 months for programs like this, now is the time to consider an alternative to the traditional marketplace, and that is exactly why I am so busy today.