StORES Magazine - August 2007 - (Page 76)

RISK MANAGEMENT Retailer-Held Captives Creating an insurance subsidiary can focus coverage, reduce costs BY CRAIG GUILLOT rom workers’ compensation and liability coverage to windstorm and property insurance, retailers are seeing premiums and deductibles rise across the board. A number of retailers are starting up their own insurance captives as a way to maintain and stabilize risk management operations and costs. F Jim Girardin, executive vice president and leader of the captive practice of the Willis Group, said that in its purest form, an insurance captive is simply an insurance subsidiary that is owned by an organization. By formalizing its own insurance and risk management operations, a company can gain control of the costs, better predict risks — and avoid sharing risks with other organizations. Because retailers often have predictable levels of claims on liability, property and workers’ compensation each year, they can be great candidates for captives. Most important, an organization can establish a captive to custom-tailor insurance coverage to meet its needs. By purchasing reinsurance for the unknown and allocating capital to that captives also offer companies the ability to provide coverage for items that may otherwise be unavailable or unaffordable. Ownership also permits the company a high degree of control in litigation and claims settlement strategies that can reflect the needs of the parent company, not just the insurer. Many organizations can use the captive subsidiary structure to manage claims and risk in a more formalized way. As an internal structure finances the risks, companies have access to a regular reporting system and an audited financial statement each year. And when the inner workings of risk management and their consequences come in-house, Girardin says, senior-level management will become far more involved in the issue. of captive activity in recent years. Since entering the industry 26 years ago, Vermont has grown to be the largest onshore domicile for captive insurance, according to Molly Lambert, president of the Vermont Captive Insurance Association. With a regulatory team of almost 30 people devoted to regulation and examination of the captives, retailers and large corporations feel comfortable basing their insurance operations in the state, Lambert says. “They want to make sure that the regulations and scrutiny these captives are given is very good,” she says. “Because of the industry’s history here, the management companies, lawyers, bankers and accountants have all developed great expertise in captive insurance,” says Lambert. Added bonus Consultants also point to the added bonus of investment and tax benefits. While a captive shouldn’t be created solely for that purpose, a captive with minimal payouts and sound investments can turn a profit. Tax benefits can vary, but the IRS issued several revenue rulings in 2002 that created a safe harbor program for captives. Companies should already be paying a million dollars a year or more in premiums before considering a captive, Landry says. Once a company decides to establish a captive, it will work with insurance industry consultants to create a detailed quantitative analysis, determine the specific life of coverage and what areas to focus on. A captive structure is then developed and a captive filing is initiated with a business plan, financial projection, articles of incorporation, bylaws and all the business start-up procedures. “There are some companies that have gotten captives up and running in two weeks,” Landry says, “but for larger companies, it’s usually a longer process — about six to nine months.” StORES Craig Guillot is a New Orleans-based writer and photographer. WWW.STORES.ORG Because retailers often have predictable levels of claims on liability, property and workers’ compensation each year, they can be great candidates for captives predictable losses, a captive can often save money for its parent company. “They know they will have fairly predictable amounts of losses each and every year,” Girardin says. “There isn’t a big point in paying for risk transfer [buying insurance] for those dollars which they can fairly-well predict.” Insurance consultant Karin Landry of Spring Consulting Group in Boston says 76 STORES / AUGUST 2007 “If run properly and holistically, it’s going to be in front of the CFO more regularly and do certain things just like an insurance company would do to deal with their risk better,” he says. Although there are a number of offshore and onshore insurance captive domiciles — from the Bahamas and Bermuda to South Carolina and Arizona — Vermont has become a hotbed http://WWW.STORES.ORG

Table of Contents Feed for the Digital Edition of StORES Magazine - August 2007

Contents Executive Editor's Page President's Page Upfront NRF News Retail People Concept2Watch Supermarkets Cover Story Online Marketing In-Store Marketing RFID Data Management Payment Systems Software Loss Prevention E-Commerce Risk Management Communications Loyalty Marketing Human Resources Mobile Commerce Loeb Retail Letter Arts Update Point of View Advertising Index Retail Industry Calendar

StORES Magazine - August 2007

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