- Tough commercial market for not-for-profits and public entities
- Captive frequently used to fill growing gaps in coverage and raise capacity
- Emerging risks and liability insurance a particular challenge
- Internal and stakeholder buy-in can be slower than in the private market
Public entities, non-for-profits, and charities have long been common utilisers of captive insurance structures, but they are increasingly looking towards captives as a means of addressing emerging risks, stifling rising costs and mitigating a lack of capacity in the commercial market.
A common challenge faced by a number of these organisations when utilising captives is the capital requirements needed to fund the formations.
The drivers of these organisations forming captives are similar to for-profit businesses, as self-insurance remains an important way to finance self-insured risk more efficiently and reduce insurance costs.
However, unlike private interests, there is usually no secondary consideration concerning tax benefits or implications.
Joe Holahan, partner at BakerHostetler, told Captive Intelligence that sometimes that is are even more compelling reasons for a public entity to set up a captive.
“Once a public entity gets the captive set up, it has a separate balance sheet where it can readily identify the savings realised on the insurance programme as it becomes surplus on the captive’s balance sheet,” he said.
“With a captive in place, it is easier to identify the financial benefits that are coming out of the programme.”
“Instead of those savings being reabsorbed into the balance sheet of the parent entity, it’s easier to roll them back into insurance programme. The savings can be used to moderate or smooth premium rates over time, and they can be invested in risk management and loss control.”
Andrew Halsall, president and CEO at Washington DC-domiciled Government Entities Mutual, said premiums received by the mutual have tripled over the past five years as government bodies counter rising costs and a lack of capacity brought about by the hard market.
GEM is a mutual reinsurer consisting of risk pools or captive insurers comprised of public entities in the United States.
“Over the last five or so years we have more than tripled our premium income and grown our surplus significantly,” he said.
Melissa Hollingsworth, enterprise risk manager at Atlanta Housing, told Captive Intelligence that the non-profit’s premiums have tripled over the last two years.
“We haven’t had significant losses, so why are we paying so much in premiums?” she said.
Hollingsworth added that Atlanta Housing is still in the process of forming a captive, and the original goal was to launch in August 2023.
“Now I’m aiming for August of this year, depending on when the feasibility study is completed,” she said.
Tax
Halsall said there is no ancillary consideration of tax benefits for public entities as tax is not applicable in most circumstances.
“In the public entity sector, or certainly in the department I’m exposed, tax is taken out of the equation altogether,” Halsall said. “All our members are not subject to federal income tax or state income tax.”
He said there may be local premium taxes in some cases, but largely the tax motivation that can sometimes apply in the private sector is not part of the proposition at all.
“Our main expense would be our claims or administration, we then earn investment income on top of that, and our net income which would ordinarily be taxable if we were in the private sector, isn’t subject to tax at all,” Halsall said.
“The motivation for becoming a member of GEM has nothing to do with tax at all in complete contrast to the private sector.
“It is more about the benefit of risk sharing with other well-managed entities and getting the benefit of insulation from the commercial marketplace.”
Hollingsworth said that once the organisation’s captive is formed, they are not expecting to receive any tax benefits.
“We are a non-taxable entity, so we don’t get any tax benefits, but that’s okay,” she said. “We can generate revenue and underwriting income from the savings we realise on the premium. We just need a sound investment strategy.”
Lines of business and risks
A number of public entities, non-profits, and charities have been unable to secure capacity for some risks and as a result have been forced to look towards captives to fill gaps in coverage.
Alex Gedge, senior captive consultant at Hylant, told Captive Intelligence: “It can be quite a difficult market to be a charity or not-for-profit, because many insurers don’t want to write it, particularly if the charity is high risk and working with vulnerable people.
“Even if they’ve got the most fantastic risk management processes, and everyone generally really cares because they’re working for a not-for-profit, sometimes markets just aren’t willing to write it.
“Quite a few have pulled out of writing charities or similar entities. They won’t write things like general liability abuse claims, or they’re fully excluding some coverages that are quite contentious.”
Charities usually require sufficient coverage because it “protects individuals, it protects employees, and it protects vulnerable people”.
“That is a key driver for some of the charities we work with as there was a genuine insurance need as they couldn’t get traditional coverage,” Gedge added.
“Some of it was bundling some of that risk and insuring it in the captive, and some of it was using that captive to access reinsurance or alternative capacity as well.”
She said there is a huge amount more that can be done in this space when it comes to captives.
“But people are often so busy doing their charity work that it’s always the classic balance of trying to find the right time to put into a project like this and get sign off from people,” Gedge said.
“In the short term, it can feel like we are moving money out of a charity, but in the longer term, we must demonstrate the value.”
Holahan said with the development of improved DNA testing and other forensic technologies, there has been a noticeable increase in claims against public entities related to wrongful incarceration and malicious prosecution.
“As a result, many old cases are being reviewed, revealing a lack of DNA evidence or new evidence that exonerates individuals who were wrongfully convicted, sometimes after spending decades in prison,” he said.
“To offer another example, it’s an unfortunate reality that active shooter situations are a real risk for public entities, even though these situations are rare. Public entities now typically obtain crisis management insurance for such risks.”
He said these events can be catastrophic and have a significant impact on public safety.
Hollingsworth said workers’ compensation is one of the first lines she would like to include in the captive, but a lot depends on what the feasibility study indicates.
“That study will guide us in deciding how much to put in and which lines to include,” she said. “A certain layer of property coverage, general liability, and perhaps auto insurance could also work.
“We might even consider D&O, but I’m in a position where I need to proceed cautiously.”
Halsall told Captive Intelligence that GEM offers workers’ compensation reinsurance, where it provides a buffer layer of up to $2m between the retention of each pool and where the excess insurer attaches.
The mutual also offers general and auto liability coverage, providing $10m worth of cover.
Speaking on episode #101 of the Global Captive Podcast, David Williams, director of risk management and safety at Boys Town, said the charity’s captive currently writes a large wind hail deductible.
Omaha, Nebraska-based Boys Town has supported vulnerable and homeless young people for more than 100 years and includes its own village campus.
“We also have all other perils (AOP) on the property, and then we have the 5×5 excess, and the workers compensation deductible is in there,” he said. “Those are good vehicles to really help fund that 5×5 umbrella access that we needed covered.”
He noted that the charity added medical stop loss to the captive last year.
Challenges
Working with not-for-profits or public entities can change the dialogue when compared to working the private, for-profit sector.
Motivations can be different, while achieving stakeholder buy-in can be a longer process and more nuanced.
“With a charity where they might rely on donations or not-for-profit where they are trying to release as much capital as possible, having start-up capital, or having the cash flow to bundle some of that money into a captive is a big challenge,” Gedge said.
“They have to try to find a domicile that will be as flexible as possible with capital requirements. A lot of it will also be about optics, where they want to fulfill a need and don’t want to look like they’re trying to bundle money and move it across state lines.
“We must be very delicate with them on those pieces and manage that well.”
Hollingsworth has had previous experience working with captives in the private sector and has been working at Atlanta Housing since 2022.
“My advice is to be patient, be accessible, be knowledgeable, and when someone from your organisation, especially those in the C-suite, asks questions about the captive, be ready with as much information as possible,” Hollingsworth said.
“This way, you can explain and help them understand what we’re trying to accomplish.”
Gedge said that with government entities she has worked with, they often have a thorough procurement process and their own way of doing things which must be adhered to.
“In comparison, if we are working with a traditional corporate, quite often they will happily let us do what we’re doing,” she said.