The captive industry has long been a sound alternative for companies with complex risks and insurance challenges that are not met by the primary insurance market. Yet even within the captive market, complex risks can pose difficult challenges. Developing a program that meets the needs of multiple businesses under a franchise scenario is one such situation. Depending on the franchise, franchisees are often expected to adhere to corporate insurance requirements – something that may overlook their unique set of loss exposures.
For one client, a network of franchisees, that challenge required innovative problem-solving and cross-departmental collaboration to deliver both risk transfer and overall value for the clients.
The challenge: disparate insurance needs
Our client was a network of quick-service franchises with multiple layers of risks and needs. They must carry workers compensation, general liability, property, and hired and non-hired auto coverage while at the same time comply with the franchise’s mandated insurance limits. The result is a fragmented insurance program that limited their market options.
In this AXA XL client’s case, each franchisee was required to carry higher than average in liability coverage – an unusual amount of coverage that can be tough to find in the primary market. The producer was having difficulty locating options for the client.
Another challenge – the client’s hired/non-owned auto (HNOA) coverage. The franchisees offer delivery as a normal part of their business operations. The current HNOA market has seen claims for commercial auto-related incidents increase in frequency and severity. Nuclear verdicts and social inflation have made insurers cautious. They are dialing back capacity and increasing pricing.
Yet another challenge this client faced – franchisees rely on bundled business owners policies (BOPs), which combine property and general liability coverage. Separating the property and BOP for the captive program meant that the remaining property risk would be much more difficult to place in the primary market.
Finding solutions
The insurer’s producer, who has deep experience and strong relationships within the client’s industry, teamed with a captive manager to explore the potential of a group captive.
They then approached AXA XL’s Group Captives team. We reviewed the client’s account and determined that there was a clear pipeline of participants to support a new captive.
We were also able to see into the franchisees’ unique set of challenges. What a group captive offered them was easy to see:
- Control over coverage availability, particularly for hard-to-place risks such as HNOA business
- Stability in pricing, reducing dependence on volatile reinsurance markets
- Ownership of underwriting results, allowing participants to benefit from favorable loss experience
- Long-term financial upside, as underwriting profits are retained and potentially returned as dividends
Yet there was the matter of the BOP coverage and how to recreate the coverage the franchisees needed without adding new risks or worsening existing ones.
Our team at AXA XL collaborated with our outside counsel and with our teams from the Property and Business groups to carve out a standard BOP policy portion of coverage, accepting the ancillary risks at or below the policy limits.
By reimagining how the BOP policy can function within a captive, we were able to build a bespoke program that addressed the franchisees’ needs without increasing the financial volatility of their risk portfolio.
How our hybrid solution was structured:
- General liability and HNOA – written within the captive, with a retention layer assumed by participants.
- Ancillary property coverages – BOP, personal property, equipment and food spoilage, for example, were included, but sub limited within the captive retention.
- Brick-and-mortar property risk was excluded from the captive and remained covered in the primary insurance market.
Our Group Captives team collaborated closely with legal, underwriting, and external counsel teams to customize and underwrite the program structure. The modified program preserved the integrity of the franchisees’ coverage requirements while fitting nicely within the captive’s risk appetite.
From initial discussions to program launch, AXA XL’s Captive group was able to develop a captive program within three months, delivering both the speed and scale needed to satisfy the franchise’s and franchisees’ needs. At launch earlier this year, there were 10 franchisees admitted to the captive. We expect to grow the captive to a point of 40 to 50 participants within the first year, with an estimated written premium of $10 million .
Moreover, the broader franchisee association in this industry has shown strong interest in the captive, positioning the program for significant expansion once the captive performance is demonstrated.
From initial discussions to program launch, AXA XL’s Captive group was able to develop a captive program within three months, delivering both the speed and scale needed to satisfy the franchise’s and franchisees’ needs.
Premiums as investment
The structure of this captive also changes the insuring of franchisees. Under a standard guaranteed cost market, premiums are paid to insurers with no return of unused funds or coverage. With the captive structure, participants can retain underwriting profits when losses are well managed. The participants will gain greater transparency into and control over their risk financing, and they will be able to build investment income over time, potentially seeing dividends from their premium dollars. This makes a captive a strategic financial vehicle for franchisees – one that does not exist in the traditional insurance market.
Applying it forward
This is a tailored solution that addresses the very specific needs of one franchise system. However, the ability to address complex risks through creative structuring can be applied across any number of franchises and businesses. Through a close, collaborative effort, the AXA XL team and our partners were able to bring together a wealth of knowledge and talent to examine the client’s business and insurance needs and devise new solutions that deliver the best protection possible.
Captive programs are a great alternative to traditional markets when industries face complex challenges to their insurance coverage. As the insurance markets continue to tighten amid evolving and growing exposures, thinking beyond the conventional solutions will become critical to ensuring that business is protected.
AXA XL’s solution-driven approach to structuring captive and traditional programs help create value beyond the insurance protection. Through our decades of industry experience, insurance expertise, and cross-team collaborations, we bring a more strategic approach to risk mitigation – one that can improve the bottom line, as well.
