Business Innovators Radio - Warren Cleveland On How to Mitigate Risk with Group Captive Insurance

Episode Date: October 16, 2023

In this episode, Nina Hershberger talks with Warren Cleveland about his journey from being a commercial pilot to becoming an entrepreneur in the insurance industry. After being laid off as a pilot on September 11, 2001, Warren had to reinvent himself and find a new career path. He turned to real estate and built a successful business with his wife. However, he soon realized that he wanted something that required more technical expertise and had a larger impact. This led him to the insurance industry, where he became a broker specializing in captive insurance.Warren explains that captive insurance is a way for businesses to have more control over their insurance coverage and costs. Instead of relying on traditional insurance companies, businesses can form their own insurance company, known as a captive. This allows them to customize their coverage, manage their own claims, and potentially save on premiums.This episode is especially relevant for business owners who are looking for ways to mitigate risk and save on insurance costs. Warren discusses the benefits of captive insurance, including control, transparency, stability, and potential cost savings. He emphasizes that captives are not limited to large companies and can be a viable option for small to medium-sized businesses as well. However, there are specific criteria that businesses need to meet in order to qualify for a group captive program.Listeners who are interested in learning more about captive insurance and how it can benefit their business can reach out to Warren Cleveland through his contact information. He can be reached by phone at 561-316-3030 or via email at [e-mail]. Additionally, listeners can visit his website at www.renuinsurance.com to access a free calculator that can estimate potential savings based on their current losses.So, if you’re a business owner looking to take control of your insurance coverage and potentially save on costs, tune in to this episode to learn more about captive insurance and how it can benefit you. Don’t miss out on this opportunity to hear from a knowledgeable expert like Warren Cleveland.MegaBucks Radio with Nina Hershbergerhttps://businessinnovatorsradio.com/megabucks-radio-with-nina-hershbergerSource: https://businessinnovatorsradio.com/warren-cleveland-on-how-to-mitigate-risk-with-group-captive-insurance

Welcome to Megabox Radio. Conversations with successful entrepreneurs, sharing their tips and strategies for success, real-world ideas that can put Megabox in your bank account. Here's your host, Nina Hirshberger. Well, welcome to the day's show. Today I have Warren Cleveland on the line with me. Warren was a former commercial pilot. Now, we're recording this on September 12th.

and September 11th, 2001, was an important day in Warren's life. He was a commercial pilot with Continental Airlines, and we all know what happened on that day. And at that moment, he was unemployed. He, along with 6,000 other pilots were on the street, and he had to change. He had to do some things. And so we're going to talk about what,

Warren is doing these days and what amazing things he has learned through those years since then. So Warren, thank you and congratulations on all of the things you've done and welcome to the day show. Oh, thanks, nine. I appreciate having me on. Yeah. So let's go back in time when those 6,000 pilots were furloughed or I guess laid off. Tell me what did you do at that particular time? I cried on my wife's shoulder trying to figure out my whole life had been spent to be an airline pilot.

I achieved this great milestone flying wide-body jets and then all of a sudden in one day it was gone. Now, granted, you know, we were alive and a lot of people lost their lives that day. So we're always we're always expressing sympathies for what happened back then. But I had to reinvent myself. I had to go from airline pilot to entrepreneur because that was the only option. And so at that point, you, if I understand right, you actually went into real estate, which you said often is what happens with people. Yeah, yeah, I hopped into real estate business as is, you know, another career.

A low beard entry, fairly easy to kind of get going, found a mentor, showed me the way, and within a few months, my wife and I had built a really great business in selling real estate, state and really taking ownership and working through a process much much similar to like what it is to fly airplanes and we we operated that business for several years but you didn't stay in the real estate business you went on and did something different I that's right I had gone going through several cycles of the real estate business and then realized you know we were for me I wanted something that required a lot more technical expertise

It was, I wanted something that had a larger impact to more people at any particular time. And a friend of mine who was a CEO of an insurance company, not an agency, but an actual carrier, told me that he thought I would be a great fit to jump in the insurance business as a broker. So literally within three months, I pivoted my entire real estate business and we got everybody licensed in insurance and away we went. I was thankful to find another mentor in the insurance business whose his focus before he sold his book of business was captive insurance. And I was enamored with that whole idea of being able to really focus on the risk management and safety part of any particular business, much like what I did flying triple sevens,

you know, you don't just kind of get in a plane and fly around the world. I mean, it's, you know, it's 16 hours from, you know, the New England, call it Newark, to China. That doesn't go with a lot of training, a lot of checking, a lot of maintenance, a lot of, I mean, just all these pieces come together, which is really risk management. And so it really, the concept of being a partner with a business owner, almost like their chief risk officer, really made a lot of sense to me. So I just jumped in both feet and decided that that's where we wanted to focus all of our time. Okay, so there's different kinds of insurance.

So when you say risk management and that kind of thing, is there a specific kind of insurance that you? deal with? No, but it typically when we're talking about captains where there are there are property captains but more times than not it's liability. So it's it's I'm buying general liability and I'm buying workers compensation insurance and I'm buying all the liability essentially to cover you know what could happen um you know what I could be liable for right So I'm buying insurance and transfer that risk. And then those well-run companies, they benefit from this idea of captive insurance. Or some would say, I want to self-insure because I'm so good at managing my claims, how do I do that?

And that's where a lot of people come to us because of that. So is the term self-insured and captive insurance, are they one and the same? They are not. That's a great point, Naina. So self-insurance is essentially I have a bank account of money and I just, it's a rainy day fund. It's not deductible for federal income tax purposes. It just sits there and gets interest and waits for something to happen and then I can pay claims out of it. But it is not true insurance.

Whereas a captive, you actually, you become the owner of your own insurance company and potentially along with other like-minded business. owners, you would join what's called a group captive and where it's kind of like, it's kind of like if you think about it, the top 20% of every industry is slowly discovering this opportunity to kind of own their own insurance. I mean, I'm a big fan of I tell people all the time to stop buying insurance, own it instead, because, you know, there's absolutely, when you move into the captive space, you get control, you get transparency, and you get stability. Because now it's all about your performance versus an insurance company trying to make a profit and hitting you for rate hikes.

I mean, if you think about it, when you buy insurance, your premium is essentially revenue to the insurance company itself. So there's no incentive for that insurance company give you a better deal because that would hurt them on their revenue line. Does that make sense? Yeah, it makes perfect sense, but now do you have to be, I mean, we're talking businesses. We're not talking individuals. We're talking businesses. Correct.

Do they have to be a certain size to be able to take advantage of this group captive insurance concept? They do, yeah. Unfortunately, and it has started, I mean, if you think about it 30, 40 years ago, the Fortune 500, they've been doing this for decades, right? They're much larger. They have large risk management, you know, staff, group. you know, people who are actively managing risk for that business for a Fortune 500 company all the time. But what's interesting is a Fortune 500 company can withstand a pretty sizable loss, and it really won't make a difference. Whereas a small business, you know, if they got hit with a couple million dollar claim, that could substantially cause them a liquidity crisis, put them out of business.

I mean, there's, you know, lots of bad things that can happen. So the group cap is to make it really work, the minimum size is about 250,000 in premium between Work Comp, GL, and Auto. So workers' compensation, general liability, and auto liability combined. That's kind of the absolute minimum to be able to pull one of these off. The average of what I see is about 5 to 600,000 in premium for those three lines combined. And that's where it really starts to make a lot more sense. Well, I can imagine a business owner's thinking, okay, I mean, that makes sense.

I've been thinking I'm hearing this self-insurance kind of thing. But, you know, the bottom line is when I work with an actual insurance company, you know, I feel more comfortable with that protection. Talk about how you mitigate the risk. How does that work for them? Yeah, yeah, that's a great question. So there's a little secret here in the idea of captive insurance that most people either don't know or not being told. And that is with a group captive especially is that you still get the backing of an insurance company. You know, for example, a contractor.

Contractor needs to show on a certificate that they have insurance of an A-rated carrier and these kinds of things to meet, you know, contractual obligation. So what happens is that the business owner, the contractor, they'll take a little bit more risk than they otherwise would. And so they're going to take the first layer of risk, but then the large claims are still going to be covered by the insurance company. And then that company is actually going to put their name on that certificate. So most people, they'll never know you have your own captive insurance company. they just see, you know, a particular insurance company on your certificate. And so you also get the benefit of the downside protection for large losses. So that if you have a claim that's a half a million dollars or a million dollars,

you have plenty of insurance coverage and it's not coming out of your pocket for those big losses. Okay, so it sounds like what you're saying is this group captive. So there's a group. First of all, how many would be in that group? So it depends on the captive manager because we operate as an independent agent. We have access to four different group captives. And depending on the business owner, it's finding the right fit for them because they may want to put additional lines. So certain captives, you can't add another line of business like cyber or some kind of professional liability.

It's only those work comp, GL and auto. But other captive managers will allow another line of business to go in. And that way the business owner gets the benefit of all of that protection and being able to spread, you know, being able to add other lines of business into it. Okay. So then the top line, if you want to think, insurance, the captive insurance that's doing it in that particular group. I mean, is there revenue less? How does that work?

Why would they want to be part of this? Yeah, so here's a basic calculation. So every insurance company operates in a similar fashion, right? Whether it's travelers or Liberty Mutual, which are great companies and not knocking them, or your captive insurance company. So for every dollar premium that you spend to an insurance company or to your capital, 40 cents of that goes to actually. operate the business right so it's a pay office expense or a an insurance company it's paying the attorneys and the accountants for your captive but it all kind of equates to about 40 cents of a dollar now what's cool is the 60 cents right so that's the balance of every dollar

60 cents is underwriting profit and if you're a business owner and you're successful at managing your risk in your claims and you don't have any claims in a particular year and there are plenty of businesses who don't that 60 cents in the traditional insurance world goes to the carrier and that carrier is using that underwriting profit to pay for the claims of others so the winners pay for the losers in the traditional market and right so what I tell business owners I'm like okay do you want to subsidize your competition who doesn't do as good a job as you and have them because they they could be insured with the same company, you're paying for their losses. You really, you want to do that.

And they're like, no way, I don't ever want to do that. And then versus a captive, if you're in a captive, that 60 cents is now underwriting profit. And should you not have any claims, that money, now it's not going to come back right away, but that money is yours. That'll be your underwriting profit and surplus to be able to come back to you in terms of the distribution or you want to diversify other lines of business. and add additional coverage, it's up to you.

But that's the real sweetheart of the deal with the CAPTA is that you get to keep the underwriting profit instead of giving it to an insurance company along with everybody else. And so that's where the potential cost savings come into play. Well, that's the first part. The second part is, you know, we call it class underwriting. So a particular insurance company in the U.S., has a book of business of contractors. And I don't mean to pick on contractors.

You just, you know, it seems to be, there's a lot of them. So an insurance company will see losses stemming from a class of business. And they do what's called class underwriting. So they're going to say, hey, look, even though you're a contractor and you've had no claims, we have all these other contractors in our book of business, right? Because that's how insurance companies work. They use the law of large numbers. They aggregate as many policies together as they can and the winners take the loses as I discussed before.

But in a class underwriting piece is all the contractors are in the country in their book of business, and they start to see losses in a particular class, and all of a sudden, everybody's going to get a rate increase, right? Even though you've had no rate increases, but you're part of that class, so you're going to get it. Or you get non-renewed because the carrier decides it doesn't. see that particular class of business is being profitable any longer, and it non-renews that entire class of business. And I know plenty of people who are going to hear this or read it, they're going to see that, and I know exactly what I'm talking about. What's cool about the captive is that now, because you are an owner of the insurance company, your renewal, all of your

performance is based on you. So if you have a great year, you are probably going to see a renewal decrease and it is not uncommon at all for as long as the loss histories don't change appreciably for most of the companies that we bring into group captives they will actually see a rating decrease in the first three years upwards of 30 percent because they are now no longer subject to class underwriting and the well-managed business is going to see a rate decrease that is substantial now will it go down forever no there'll be a minimum of um amount where you still have to pay expenses on your captive and you have to justify that the IRS that you know, that it's real insurance. So there's some ones called loss costs in there.

But that's just in case you should ever have a claim. You've got money to pay it. But the idea is you no longer have to worry about renewal time and what could be coming from that insurance company because you already know the kind of year you've had. So there's no, there's none of this, you know, hiding behind the curtain where you're going to get. It wrapped in the head with this huge renewal increase when you know you've had no claims throughout the year. Okay, there's always pros and cons. So what's the cons? What's the risks of being part of a group captive? Yep. Great question. And there always are disadvantages. I write several articles about this exact idea. And that is, I think the biggest one is you have to have liquid. You've got to have the capital to be able to deal with, what if I have multiple claims,

and without getting into A-Fund, B-Fund, you know, frequency and severity layer and explaining all that on a short little podcast here is say you had multiple frequency claims. So you had multiple claims that were 50 grand each, and you had five of them. And your deductible, for lack of a better term, is 100 grand. So now you're going to go, you're going to be 150 grand in the whole. So in the frequency layer, that's something you own. So you don't share that with anybody else. You're paying to that.

So if you have multiple claims in a given year that exceed what your layer is, your initial deductible call it, say it's 100 grand, you're going to get an assessment, and you're typically going to pay 50% of that assessment the next year, so in year two, and then you're going to pay 25% year three, 25% year four. So you're going to end up paying more than you otherwise would if you're in the traditional insurance market, if you had bad claims. That is 100% true. You're also going to have to post collateral at the very beginning. And the collateral covers your inability to pay those claims.

So say you get into the captive, you have a really bad loss year, and you're like, I don't want to do this anymore, and you walk away and you don't pay your renewal premium or you get non-renewed. The collateral is there to make sure that the captive has enough to pay your losses should you not be able to. So it is really, to be in a group captive, the business owner has to be entrepreneurial at the outset.

They have to be focused on safety and risk management above all things. And then lastly, they have to have enough capital that should they have a bad loss year that they can fund the difference. Now, it's not a million dollars in claims because that actually takes care of itself with the insurance company, but, you know, small frequency losses are coming out of your pocket. So Warren, is it fair to say that many of these kind of companies that decide to go into a group captive program have somebody on staff who's a risk manager, somebody who's really focused on that? No, no. It's quite the opposite, actually. All of the people we talk to, none of them have that, which is why that's kind of part of our value proposition. We're not the traditional insurance broker where we sell you a policy. see and see later. We're actually the insurance piece, especially when you go into a captive,

the word insurance really, it just goes away. It's no longer about insurance. It's about risk management. And now how do we make you a profitable captive owner? Well, that's managing your business risk better, right? And that can be anything from, you know, hey, I've got a contract with a particular vendor or supplier. And the wording in that puts me in a disfavored status. So let's fix that or hey my my I've got a fleet of 25 trucks I don't have GPS on them or I need cameras or you know just it's the physical like let's get let's get our hands dirty with how we can make this business safer or or something simple as managing claims um you know claims that sit out there and sit out there nobody does anything with them those tend to actually settle for much more

than the otherwise would if somebody was actively, you know, managing that claim. So that's part of what we do is we get our hands dirty and trying to help the business owner be their chief risk officer and make them profitable once they get into the campus. Well, no, that's fascinating because I'm sure that it's not the traditional insurance model. You know, an insurance agent would sell you the insurance and then they say, good luck kind of thing. What you're saying is you almost become a consultant or a coach in their own business to mitigate that risk. Well, we've created a process.

I call it Flight Plan 365. And it's obviously to take off from the days of flying airplanes for a living. But in my mind, it's how we start with a business in the beginning, right? So we do an audit. We understand, like it's like going to a doctor. They're going to ask you a bunch of questions before they offer you a diagnosis and or a solution. We're in the same boat. It's okay, are you eligible for a captive?

Have you checked the first couple of boxes? Yes. All right. But are you just lucky or are you good? Meaning are your lost history, is your loss history representative somebody who's really managing their claims? Or is it just by luck that you've had no bad accidents or incidents? And our audit will actually prove that out. Any risk committee or captive manager will want to see like a full detail on whether you're lucky or good.

And so we provide that. And then along the way, that's when we start improving that as part of our process of showing that business owner how to be profitable. And that's funny, most business owners that I run into are very conscientious to their employees, at least the ones who I think are good fit for captives, they're always worried about their people going home every night. They may not have all the tools yet or all the pieces to be able to put a formal risk management program together, but they've started something that's meaningful, right? They're doing some of the laid work already.

That's what I found. And what we bring compliments them and allows them to really take advantage of captive insurance. Well, there's no doubt probably your experience as a pilot and all of the details you have to know about. Because in a group captive, I mean, you're an agent. So you're facilitating them being able to have their own insurance company. I suspect all agents are not created equal, which is why you're explaining some of those things. Yeah. Yeah.

I mean, I don't want to speak for what other people. do, but I know for a fact that what we do is very unique. It's, it's, it's, uh, with our process and our people and being able to work with a business owner as a partner. And, and really, they're getting just this massive benefit. And, and look, we know, truth be told, one out of every five years, they're going to have a bad year, right? Something's going to happen. Bad things happen to good people all the time. It's how do we mitigate that risk as much as we can, understand that we're going to fund our captain, you know, to a certain level so that it's not as this huge out-of-pocket problem. And just know we're going to, everybody's going to have

some bumps along the way. You know, nobody, it's not, it's never perfect. It's never perfect. You know, your accidents do happen. And it's just what can we do to minimize the impact on the business owner so that they can maximize their profitability as their captive owner. So if I go back and remember what you said, it's realistic to say if a business owner is large enough, meets the criteria, works with somebody at your level and your team, that they could very well see a 30% reduction in savings reduction? Did I remember that right? Yeah, that's what we see typically in the first couple of three years because the renewal, your renewal premium is now only based on their losses, not the entire class, not every contractor in a particular carrier's book of business.

But once they're in it and they're in it for five or seven years, because it is really a long-term business strategy, this isn't something you just get in one year and leave it the next and vice. It doesn't work that way. But, I mean, I've seen well over 50% in total costs of risk reduction for any particular business that if it owns it, sticks with it. it makes a lot of sense. So what about the migration?

You know, today they have the traditional insurance. They really understand what you're talking about. They think it makes sense. They're willing to do it. Do they shut off the one and the next day you're part of the group? Is that how it works? Yeah, yeah. It's short form, yes.

I mean, you still have to get approved to join. I mean, I think it is the, it's the hardest country club you'd ever want to try and get into because the folks in the captive want to make sure you're good and you're not just lucky. But in essence, yeah, we did the underlining. We put you in front of the risk committee. I always recommend before you join, you go to a board of directors meeting or a risk workshop, check out what's going on, meet some of the people in the captive. Fear it for yourself.

I mean, you know, don't just take my word for it and know the people you're going to get into business with. That's another thing. So go meet some of those folks. And that's fine. The first workshop, I love to take new prospects to the workshops because they're always mystified. I said, you will never hear the word insurance in this room. And they just can't believe it.

Like, you mean to tell me nobody, nobody cares about it? No, they don't. They don't care about it. What they're talking about is managing their risk better. So you get best practices from industries all over the country, different people, and how they're tackling different things. And it's a, you can share without feeling like you're talking. your competition and you get the benefit of all that brain power all in one place.

Are there any tax considerations with this kind of thing? Yeah, I mean, yes, I hate saying that because there's some bad actors on the internet who want to tell everybody is a business owner, the tax is the number one reason. In fact, it doesn't even make my top 10 list of why captive should be considered. you know, if you can make money, you're going to get taxed on it, right? So let's just say that to self-insure your business, if you just put it in a bank account, that's not tax deductible for insurance purposes until you pay a claim.

But when you join a group captive, you get the benefit of having money in a bank account that is backed by real insurance company, and you're getting the benefit of that premium being deductible for federal income tax purposes. Well, Warren, this has been fascinating. I'm looking at the clock, and we are almost out of time. Is there a question I may not have asked that would be very important for anybody that's considering this kind?

You know, I think you've asked it, but I think it begs to be, to kind of revisit it, is, you know, how much money could I really make it a captive? am I a fit? Because I think those two things, the personality of the business owner comes out, and that's such a big part of whether this makes sense or not. Fantastic. Okay, we are out of time, but I think if somebody is interested in knowing more, can you tell me how can they get a hold of you? Obviously, contact information, they can call the opposite five, 6133630 or email Warren at Renew Insurance and that's R-E-N-U-N-U Insurance.com.

Or if they want to just go to our website there at Own My Insurance Company.com. They can get a free calculator and see what the real savings would be based on their current losses. Yeah, that's a fantastic offer. So Warren, thank you so much. great information. I'm sure there are going to be listeners that are really, really going to reach out and interested in learning more.

So thank you for being my guest today. Thank you. Appreciate the time. So until next time, this is Nina Hirshberger, saying go out and make it a great day. Thank you for listening to Megabucks Radio with Nina Hirshberger. To learn more about the resources mentioned

on today's show or to listen to past episodes visit megabucks radio.com.