Operating Your Captive
as a Profit Center
RIF007
April 29, 2014
1:45–2:45 p.m.
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SCOTT ARNOLD, MS, ARM, SPHR
President, Westmerica Insurance Company
• Over 27 years at Phil Long Dealerships — CAO
• Manages insurance operations, risk management, and
human resources
• Masters in Education; Associate in Risk Management
CATHI TRIPPE, ARM, CIC, PHR
Director/Risk Management, Westmerica Insurance Company
• Over 17 years at Phil Long Dealerships — Risk Mgmt
• Experience in auto liability, employment practice liability,
and mediation
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WHAT TO EXPECT FROM THIS SESSION
• Review traditional benefits of captive insurance
• Learn innovative ways to structure a captive
• Identify tools to improve the performance of
a captive
• Define methods to turn a captive into a profit
center and tactics to enhance a captive’s
bottom line
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MONEYBALL
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PHIL LONG DEALERSHIPS INC.
• Automotive dealership group based in Colorado
• Ranked in top 100 Mega Dealers in the U.S.
• Been in business since 1945
• Privately owned
• Over $620 million in annual sales
• 13 locations/25 buildings
• 900 employees
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WESTMERICA INSURANCE COMPANY
• Pure captive domiciled in Colorado
• Headquarters in Colorado Springs
• Started in 1994
• Over $15 million in assets
• 19 shareholders
• 5 employees
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WESTMERICA MISSION
• Reduce losses through effective loss
prevention and claims management
• Increase profits to our dealerships through
lowered insurance premiums and return of
premiums to stores with good risk practices —
goal to be 10–15% below market
• Continue to bring new products and services
to our dealerships
• Provide non-cumulative 30% of equity return
to our shareholders
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TRADITIONAL BENEFITS OF A CAPTIVE
• Cost savings
• Direct access to markets
• Greater control — claims management,
unbundled service providers, buy insurance
when it’s cheap
• Improved long-term stability — reinsurer
traditionally less volatile
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UNEXPECTED BENEFITS OF A CAPTIVE
• Power of investment income effect
• Ability to build insurance rates
• Improved overall business savvy
• Cash flow business needs
• Provide investment opportunities for key
personnel — golden handcuffs
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OUR STORY
Our Motivation for Going Captive
• Problems finding coverage for auto physical
damage
• Concerns with sky-rocketing Workers’
Compensation premiums
• Weary of insurance market controlling our profits
• Poor attitude towards risk management
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Recording of this session via any media type is strictly prohibited.
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OUR STORY
Laying the Foundation of the Captive
• Established a foundation of Risk Management
practices
• Obtained management support for overall
best practices
• Shifted paradigms — use of company vehicles
• Instituted best practices for Workers’
Compensation
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CHALLENGES ALONG THE WAY
• Fear of the unknown — appetite for risk;
aversion to taking on risk
• Accountability
• Expenses and time away from core business
• Raising capital
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WESTMERICA — “THE BEGINNING”
1994 — Risk Phase
• $500,000 capital
• 11 shareholders
• CEO
• COO
• CFO
• Corporate Attorney
• General Managers
• Risk Manager
• Coverage: Workers’ Compensation, auto
physical damage, general liability
• Consultants/Captive Administrator
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WESTMERICA — “THE RESULT”
2013 — Riches Phase
• Assets: $15 million
• Liabilities: $3 million
• Dividends Paid: $4.3 million
• 2013 After-Tax Income: over $1 million
• 2014 After-Tax Income: trending over $2 million
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CURRENT PRODUCTS
• Workers’ Compensation
• Auto physical damage — comp and collision
• General liability/property
• EPLI, fiduciary, crime, pollution
• Surety bonds
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CURRENT PRODUCTS
2013 Surety Bonds
Cost per
Bond
Bonds
Sold
Totals
Salesperson
($15,000 coverage)
$65
420
$27,300
Dealership
($50,000 coverage)
$385
11
$4,235
431
$31,535
Bond Type
Totals
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CURRENT PRODUCTS
• Workers’ Compensation
• Auto physical damage — comp and collision
• General liability/property
• EPLI, fiduciary, crime, pollution
• Surety bonds
• Financial products — Secure Products
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CURRENT PRODUCTS
2013 Secure Products
• Secure products sold — 13,415 units
• Secure product income — $752,898
• Secure Finish
• Secure Mark Plus (with Secure ID)
• Secure Road
• Secure Roadside Plus (with ADR)
• Secure Windshield Plus
• Smart Payment
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CURRENT SERVICES
• Risk management
• Disaster recovery
• My Maintenance Plus administration
• Independent insurance agency
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Recording of this session via any media type is strictly prohibited.
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FOUNDATION FOR SUCCESS
 Obtain financial involvement by key
personnel — raise initial capital
 Implement Risk Manager Bonus Pay Plan
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RISK MANAGER BONUS PAY PLAN
Workers’ Compensation Severity
(based on rolling 3-month average)
0 – 20% = $1,500
21% – 30% = $1,300
31% – 40% = $1,100
41% – 50% = $900
Premium $270,750
Incurred
Loss Ratio
$95,750
35%
51% – 60% = $700
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RISK MANAGER BONUS PAY PLAN
Workers’ Compensation Frequency
0% – 0.50% = $1,200
0.51% – 0.60% = $1,000
0.61% – 0.70% = $800
0.71% – 0.80% = $600
0.81% – 1.00% = $400
# Claims per month
Total # employees
Claims as percentage
of population
6
900
0.6%
1.10% – Up = 0
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RISK MANAGER BONUS PAY PLAN
Employment Practice & General Liability Severity
(based on rolling 3-month average)
Loss Ratios
0 – 15 = $1,400
16 – 25 = $1,200
26 – 35 = $1,000
Premium $302,000
Incurred
Loss Ratio
36 – 45 = $800
$75,200
25%
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FOUNDATION FOR SUCCESS
 Obtain financial involvement by key
personnel — raise initial capital
 Implement Risk Manager Bonus Pay Plan
 Unbundle services for better control
 Insure what you can control; transfer the
rest (i.e., wind and hail claims)
 Continually identify sources of new revenue
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FOUNDATION FOR SUCCESS
 Include risk management expenses in rates
 Pay for results — cost containment, dividend
 Produce monthly financial profit and loss
statement — like a profit center
 Meet quarterly with Board of Directors and
annually with shareholders
 Follow the 5 “P”s — People, Passion, Process,
Product, Profit
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CHANGE YOUR GAME
• Pull claims history — identify where it makes
sense to take risk
• Challenge the status quo — “shake it up”
• Create a game plan for success
• Review current investment strategies
• Develop a profit center . . . not just a risk
financing strategy
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Questions, Final Comments and
Contact Information
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KEEP THIS SLIDE FOR EVALUATION
INFORMATION/MOBILE APP ETC.
Please complete the session survey on the RIMS14 mobile application.
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