Tuesday, May 21, 2024

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Premium increases in agriculture open the door to captives

  • Group captives and cooperatives are a common way of diversifying risk in the sector
  • Having funds available to form a captive an issue for some in the industry
  • Crop insurance and employee benefits provide challenges unique to agriculture

The agriculture sector provides a unique opportunity for the captive industry to help organisations mitigate rising costs in the commercial market.

Group captives and cooperatives are commonly utilised in the agriculture space as industry members look to band together to diversify their portfolios amid growing challenges.

Like most industries, property cost is one of the main insurance issues facing agriculture, while crop insurance is providing a unique set of challenges for the sector.

Healthcare is another risk where the agricultural sector offers a distinctive set of challenges, with many in the industry having limited access to health facilities.

Julie Patel, senior vice president, central zone captive consulting leader at Marsh, said that because of the unpredictability of the insurance market, agriculture captives are increasingly looking for alternative financing solutions.

“Property is the primary driver right now, and markets have been pulling back a lot in terms of capacity and pricing, which is driving the agricultural companies to look for other options,” she said.

Patel said that long term, captives need to be a growing part of the insurance discussion for companies in the sector.

“Within the agricultural space, captives have been underutilised for some time, and clients are now looking for new and creative ways to finance risk and captives are one of them,” she said.

Dustin Partlow, president at Caitlin Morgan Captive Management, said in Vermont there are a number of small dairy farms owned by multi-generations of farmers who are having a difficult time.

“There are more and more large agricultural companies that are dominating the space,” he said. “It’s an industry where there’s a lot of risk-taking, and it’s inherent in these farmers’ blood.”

Similar to Patel, Partlow also said he is seeing an increasing number of opportunities in the sector.

“Naturally in the agricultural space, just like in many different industries, there’s a lot of consolidations, and we always hear about the small farmers having a hard time making it.”

Members of the GROWMARK captive are saving more than $20m in premium cost since placing their property risk inside the captive.

GROWMARK is an agricultural cooperative with around 250 members, but not all of them participate in the captive.

“We provide the fuel and propane, but we also provide the seed for planting, crop nutrients, crop protection, and all the agronomy products that the farmer needs,” Jaci Mennenga, director of risk management at GROWMARK, told Captive Intelligence.

The company has two Vermont-domiciled captives, one for property and casualty insurance, and another for health insurance.

Mennenga said workers’ compensation has been in the GROWMARK captive for the longest period.

“We just renewed that on 3/1, and our broker put together a graph where we know that our frictional cost per $100 of payroll has stayed relatively stable for over a decade,” she explained. “That’s really a testament to how we leverage our captive.”

Partlow said that one challenge when it comes to self-insurance in the agriculture space is that many in the sector do not have a lot of excess funds to explore things like captive vehicles.

“Farming is a very challenging industry, and all it takes is one year where crops don’t grow correctly or there’s a downturn,” he said.

“Having those excess funds to start up a captive programme and be able to appropriately capitalise it can be a challenge.

“In my experience, at least in the last few years, I’ve had a lot of discussions, but not many of them have gone too far.”

Captive structures

Group captives are common in the agriculture space as they allow companies to diversify portfolios often highly suspectable to flooding and draughts.

“It’s wonderful when you gather a group of like-minded insureds who are all in the same industry forming a homogeneous captive, much like an agricultural captive,” Mark Benz, head of group captives at AXA XL, told Captive Intelligence.

Benz said when these companies come together, they can share ideas on how to improve and enhance their risk control and loss prevention efforts.

“Additionally, they can reap the rewards of dividends or receive monetary returns for effectively managing their loss experiences,” he said.

Benz said there are several group captives that focus on the agricultural space, and “there’s a couple that we have that are mainly focused out in California”.

“Each of the larger intermediaries run at least one group captive programme in agriculture,” he added.

Partlow said he has seen some success with group agriculture programmes where, for example, large lettuce growers in California all band together to share risk.

“On their own, usually the capital commitment upfront is not possible, and they generally do not have a lot of excess assets to be able to get something off the ground,” he said.

“It’s about diversifying their risk because if they are all California lettuce producers, a recall generally affects everyone in the industry, so it’s about trying to find that diversified group.”

Prabal Lakhanpal, senior vice president at Spring Consulting, said some of these companies take comfort from coming together with partners to fund certain risks.

“I think that equation evolves a little bit if we are working with a large organisation that is large enough to fund many of those risks by themselves,” he added.

He said each programme can be structured in its own unique way.

“For instance, a programme may be considered a group captive though it might really be established as an association captive or a single parent captive with multiple insureds listed on the policy.”

Partlow said some smaller companies in the industry are benefiting from utilising cells.

“With the prevalence of cell captive facilities, companies in the agricultural space, like many other sectors with small to mid-sized companies, are finding it easier to realise the benefits of a captive by utilising a cell,” he said.

Lines of business

Agriculture companies utilising captives are writing property and casualty lines commonly written by lots of businesses, including workers’ compensation, auto liability, and general liability.

“Agriculture captives are not necessarily writing something very different in terms of the lines and it’s the very similar property and casualty risk,” said Tempe Robins, managing director at SRS.

“Property is another line that as the market has been hardening, we are seeing companies putting higher and higher limits into their captives.”

Crop insurance is a line of business largely specific to agriculture businesses and comes with its own set of unique challenges.

“There are different programmes they can buy, and there’s always retained risks with it as it only covers a certain percentage of their lost crops,” Partlow said.

“Some of them don’t qualify for any crop insurance, so they’re essentially totally self-insured but there’s always an element of retained risk.”

Robins said crop insurance is a “little tricky” to write in the captive as it does not behave like other lines.

She said the losses all come at one time as we need to wait for the harvest to happen before losses can be assessed.

“It’s over the different cycles where we can see the patterns emerging,” she said.

“If a company takes that risk and transfers it into the captive, it allows the operating entities to smooth their budget so they can fund those losses ahead of time and then not see that pop on the operating entity level as those losses do occur.”

Partlow said product recall is a common line of business for agricultural captives to consider.

“Product recall affects some of these very large producers—lettuce, broccoli, you name it. When there’s an E. coli or salmonella outbreak, they just recall everything, and it’s a huge loss for these farmers,” he said.

“When that’s their livelihood based on selling those crops, and then there’s a recall that shuts them down if can be devastating.”

Lakhanpal said over the last three years, he can think of many agricultural organisations that have leveraged captives to explore employee benefits.

He said on the benefit side, a pain point is the consideration that a lot of agricultural people are obviously not living in cities.

“Access to healthcare is a major aspect of discussion and the cost of healthcare is also a major pain point for them,” he said.

“It is organic for them to look for solutions that drive more access to care, more control over their plans, and a lower price point from a cost perspective.

“Captives are helping organisations create unique plans that that are helping them achieve those goals.”