Agency captives can align interests of brokers and carriers

Agency captives can offer agents and brokers the opportunity to earn underwriting profits previously retained by the insurance carrier, and align the interests of the agent and carrier regarding risk selection, pricing and loss control.

This is according to a panel of experts speaking at a session on Vermont’s newest captive structure, the agency insurance captive, at the Vermont Captive Insurance Association (VCIA) annual conference in Burlington, Vermont, which is taking place this week.

Speakers included Bob Gagliardi, global director of captive management and US fronting at AIG Insurance Management Services; Jesse Crary, shareholder at law firm Primmer Piper Eggleston & Cramer; and Peter McDougall, attorney at Paul Frank + Collins.

An agency captive is a captive formed an owned by an insurance agent or a broker, intended to provide reinsurance to its insured clients. Unlike traditional captive structures, the captive is not owned or controlled by the insureds.

“The same type of reinsurance relationship the carrier may have with any commercial reinsurer they will have with the agency captive,” said Gagliardi.

He suggested the captive should be the place where the agency puts its best performing business.

“This should be the place where the agency puts its best performing business. So ideally if the agency says ‘this is my best business, I’m interested in it, I own it and I’m going to take a part of it and share the risk,’” said Gagliardi.

Generally the best type of business that is appropriate for an agency captive is programme business that is homogenous in nature, according to the panel.

Vermont recently introduced legislation to allow agency captives to be formed within the domicile.

At a separate session, David Provost, deputy commissioner of the captive insurance division for the Vermont Department of Financial Regulation, suggested that after seeing a few examples of how the agency captive concept could work decided to embrace the idea, which was then signed into Vermont's captive law.

Sandy Bigglestone, the director of captive insurance for the state of Vermont, said: “We know the agency is going to form the captive for a profitable book of business, it’s going to be beneficial not only to the agent, but it will also be beneficial to the clients in their book of business, the insureds and the fronting company.”

The minimum capital requirement of the agency captive in Vermont is $500,000, and the captive must be “owned or directly or indirectly controlled by one or more insurance agencies or brokerages”.

Furthermore, the agency or broker with control or ownership over the captive must remain in good regulatory standing, according to Vermont law. The captives must only insure risks of commercial policies placed by the agency or broker owner and the captive must disclose to the policyholder the nature of its affiliation with the broker or agent and relative limitations, rights and obligations of the captive as compared to the policyholder.

Crary added: “There’s going to have to be a disclosure that will likely appear in the policy that is being issued that will explain the affiliation between the insured’s broker and the captive insurance company that is acting as a reinsurer. So that’s going to be visible to the insured.”

This article was first published on Captive International.

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