Posts Tagged ‘USA Risk Group’

Will a Financial Tsunami Hit the World’s Insurance Markets?

March 17, 2011


By now no one on the planet is a stranger to the disaster in Japan that continues to unfold as I write this.  A devastating 9.0 earthquake that triggered a massive tsunami has inflicted on northern Japan a disaster of biblical proportion.  Even now unfolding are potential disasters at 4 nuclear reactors impacted by the earthquake.  Fuel rods have been left exposed, the containment chambers cracked open, and radioactive gasses are leaking into the atmosphere.  The magnitude of the disaster continues to grow by the hour.  Deaths are conservatively being estimated at 15,000 people although there are whole towns that are unaccounted for and this number will likely climb.

As bad as this is for the Japanese people, it will soon have a ripple effect across the planet.  Japan is the third largest world-wide economy and its government, businesses and people are one of the largest investors in the United States.  Those investments are being called back to begin funding the rebuilding of Japan’s infrastructure.  With that lending capacity out of the market the cost of borrowing will start to rise.  Boston-based AIR Worldwide, an insurance catastrophe modeling firm, has estimated the insurance costs associated with just the earthquake to be upwards of $35 Billion.  The overall costs will go up when the effects of the tsunami and the potential for radioactive leakage from the troubled nuclear plants are factored in.   Herein lies the second impact on the global economy.

Insurance analyst had estimated that it would take a $50B event or combination of events this year to turn the insurance market away from its decade-long pricing slide and trigger a hard market response.    The last 4 months have seen a $10B earthquake in New Zealand and another $10B in losses associated with continued unrest in the Middle East.  The Japanese earthquake and tsunami will easily tip the scales above $50B in just the first quarter of 2011.  If indeed the analyst are right we may see an unprecedented increase in insurance prices due to capacity problems with the global reinsurance market.

Captive insurance programs have often served as a refuge when overall insurance market prices increase.  The critical aspect to involvement in a captive insurance program now is the timing.   In order to derive maximum value to a captive program you must initiate it ahead of the crisis.  Businesses that have historically been at the forefront of risk financing instability like transportation, energy, manufacturing and medical professional liability need to take immediate action if they want to mitigate the impact of this global shift in insurance costs.  Captives, and other alternative risk structures, can provide insurance capacity where there is none in the market.  They can also mitigate your exposure to rising insurance costs.

If you are interested in discussing how an alternative risk program can benefit your organization we have a team of consultants and advisors ready to meet with you.  Contact us at 440-264-9992 so that we can direct you to one of our team members.


ALARYS Conference…Latin America is Open for Captive Insurance Business

October 13, 2010

The ALARYS conference for Latin American Risk Managers is just finishing up today in Southampton, Bermuda.  As an attendee I can tell you that it was well attended, that the conference speakers were top-notch and the message that Latin America is open for captive business was well communicated.

The potential that exists for doing business in Latin America, in particular Brazil and Argentina, is astounding.  Latin economies are stable and growing exponentially.  Latin Risk Managers that represent large multi-nationals have embraced the use of captives and many other localized risk managers are looking for creative risk financing programs and are seeing captives as a viable solution.

There are some hurdles to overcome for captives to become commonplace though.  In the US and Europe, captive growth went through several transitions overcoming resistance and compliance issues.  That same process will have to take place in Latin America.  The two largest insurance markets, Brazil and Argentina, have come a long way in the past several years to making this happen and I am confident that they will continue to make changes that are culturally appropriate and that make sense for their corporate citizens to take advantage of the capital efficiencies and loss controls that captive insurance can leverage.

As for me, I’m getting myself ready for the opportunities that will present themselves in the coming years.  I am studying the culture and history of Brazil and Argentina and trying to learn Spanish and Portuguese.  If Latin America is open for business I want to be first in line to help them.

Education is Key to Execution

January 8, 2010

Education is the key to being able to effectively implement and execute a sophisticated risk management regime like a captive insurance program.  This doesn’t only apply to the accounting and insurance professionals that are involved in the day-to-day operations of these types of programs.   It also applies to the risk managers who represent companies that own them and to insurance producers that help to set them up.

There are several venues to learn about captives and how they are used.  The International Center for Captive Insurance Education (ICCIE) provides an online platform of coursework that leads to the Associate in Captive Insurance (ACI) designation.  I am on the faculty for this program and it is an excellent course of study for accounting, insurance and business professionals to get a solid foundation of captive insurance concepts.  You can find more information at

Several associations provide annual conference opportunities that are full of great educational content.  The Vermont Captive Insurance Association, the Bermuda Captive Conference and the Cayman Captive Conference are all venue-oriented educational experiences and are excellent for delivering timely information on emerging industry issues.

For more general insurance and underwriting educational topics there are several continuing education websites that can provide the ongoing training needed to maintain licenses and credentials.  I sponsor one of these websites at

Finally, industry service providers organize conferences that have client education as their primary purpose.  USA Risk Group (, the largest independent captive services company, sponsors an annual educational conference for captive industry participants.  This type of conference is typically more focused on the practical nuts and bolts issues of captive insurance and the smaller group results in better access to speakers and service providers.   The conference is highly rated by participants.  This year’s conference will be held in Charlotte, NC at the Ballantyne Resort, May 26th-27th, 2010.  You can contact me by email at for specifics on registration for this event.

Education in and of itself is worthless.  It’s not in the knowing, but rather in the application of the knowledge that yields results.  These educational opportunities will give you what you need not only to understand the concepts of captive insurance but to apply them to your circumstances.

Execution is always the factor that divides the successful and the wannabe.  Gain the knowledge you need but don’t forget to deploy that knowledge in a meaningful way to solve risk related problems for your organization.

New Sheriff in Town

April 29, 2009

Depending on which side of the fence you live on you either see underwriters as the scourge of the industry because they get in the way of your producing business or they are the saviors of the industry because they are the gatekeepers protecting the company from risk.  This has been an age old battle and frankly I’ve always seen it as beneficial, helping to make sure that insurance companies write as much good business as they can get their hands on.  If producers want to write everything and underwriters don’t want to write anything then somewhere in between is a healthy balance that allows for something to be written profitably.

The compromise that a risk underwriter can strike with a producer when considering an application for insurance is predicated on the theory of large numbers and the recognition that over a large enough book of business and time that a measured approach to risk consideration will yield profit.  Sometimes they will get it right and sometimes they will get it completely wrong, but on average it will work out.  Risk underwriters are allowed to make a certain number of  mistakes and still be seen as successful.

There is a new underwriting Sheriff in town now and this one isn’t allowed to get it wrong, ever, and its causing a lot of consternation in the alternative risk and captive insurance arenas.  Credit underwriting has long been like a camel poking its nose under the traditional insurance tent.  Granted, there is a correlation between credit worthiness and risk quality and it should be considered as one of the underwriting criteria, but because of the current financial crisis it has taken on a life of its own particularly in risk sensitive programs.

In large deductible and captive insurance programs the insurance company providing coverages  must consider the credit worthiness of the risk taker as a part of the overall risk they are assuming.   These risk transfer programs have elements of both underwriting and credit risk.  Balancing the underwriting of risk has been dealt with effectively over the years by recognizing that if you prudently insure a large enough pool of risk that you will end up winning over time and making a profit.

Credit risk is still a relatively new stand alone discipline and as a result it is still trying to get its footing on what has been a slippery economic slope.  Unlike their risk underwriting associates, credit underwriters don’t have the flexibility to get it wrong.  Credit underwriting to this standard would be like a risk underwriter looking for loss picks in the 90% actuarial range.  It stops being a pooling mechanism at that level and the client might as well completely self insure.  Combine this with the enhanced regulatory and compliance environment that we find ourselves in and we have a big problem when it comes to deductible and captive insurance programs.  Rather than assume a measured degree of credit risk this new breed of underwriter is seeking full collateralization of every deal. Its a bit like the joke that a banker won’t loan you money until you can prove that you really don’t need it.

The solution to this problem is for insurance credit underwriters to embrace the theory of large numbers and to recognize that they can assume a measured degree of risk and on an overall book of business end up being whole.  They, and their managers, must be willing to accept some degree of loss as a part of their cost of doing business.  Until that happens alternative risk program development will languish for all except those that don’t really need it!

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.

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, 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