More franchise businesses and franchisees in the United States are beginning to “connect the dots” and see the parallels between their business model and captive strategies, according to Kristie Barlow, managing director and franchise program leader at Marsh Affinity.
On the latest episode of the Global Captive Podcast, Barlow was joined by Michael Jeffers, senior manager in actuarial consulting at Oliver Wyman, and Savannah Dennis, vice president at Marsh Captive Solutions, to discuss the growing interest in captive solutions among franchise organisations.
“I’d say more and more of the franchisee world is starting to connect the dots and see parallels between the business model of a franchise system and that of a group captive,” Barlow said.
“Both are really predicated on economies of scale, leveraging the power of their numbers, and establishing turnkey solutions that can be repeatable for each and every franchisee within that system. And likewise, each and every participant within that group captive.”
Jeffers echoed those thoughts and said franchisees valued the control they get from a captive approach, rather than feeling insurance was something that they were “on the receiving end of”.
“If you have good experience, you can be directly rewarded for that instead of the socialized model that you’ll see in an insurance carrier where actuaries like me, we’ll group you together by a class of insureds and however the class is doing, that’s going to indicate your rate,” he explained.
“There is some consideration for your experience, but not as big as a reward for it as there is in the group captive.”
Dennis said while pure captives and cell companies can be used for franchise captives, the group captive structure is often the most appropriate.
A pure or cell structure can work if the parent of the entire franchise wants a significant shareholding or is managing it on behalf of franchisees, but a group captive approach works well when franchisees are working together and owning the initiative.
“We typically see them using a group captive structure because most franchisee parents in the US have concerns about joint employment, so they want to keep some distance from the transaction,” Dennis explained.
“In a group captive structure, all of the franchisees can be owners of the captive and the parent does not have to be involved.
“No matter the captive structure, we always partner with a fronting carrier since the captive is only going to be licensed and admitted in its state of domicile, and the franchisees are going to need admitted paper in the states that they operate in. So that’s a really important piece of this equation.”
With regards external drivers of franchisee captive interest, they included the commercial market dynamics and the economies of scale that can be achieved when franchisees group together.
“Commercial market pricing for certain exposures can become cost prohibitive, particularly if a carrier hears that the franchisee has first party delivery, that the franchisees’ employees are driving pizza to their customers, that’s going to drive up premium automatically,” she said.
Franchised convenience stores is another segment that has is experiencing a tough time in the commercial market.
“We’ve seen certain states and markets just completely pull out of that classification altogether and non-renew an entire book of business, making it really difficult for a convenience store franchisee to obtain the coverage that they’re required to carry,” Barlow added.
“So that would be another driving cause for that franchise system to launch a captive solution.”
She also highlighted nuclear verdicts and social inflation impacting the affordability of coverage and availability in the commercial market.
Listen to the full discussion on captive solutions for franchise businesses and franchisees here, or on any podcast platform. Just search for ‘Global Captive Podcast’.