Multi-Unit Franchisee Magazine Issue II, 2017 - Page 60

Captive BY EDDY GOLDBERG INSURANCE TURNING AN EXPENSE INTO A PROFIT A fter 9/11, Mike Borchard watched his annual insurance premiums for his 15 Carl’s Jr. restaurants in San Diego more than triple, from about $300,000 to about $1 million. Borchard, an attorney, and his partner, a restaurateur with some Carl’s Jr. locations of his own and about a dozen Denny’s, had heard about cap- tive insurance and began to look into it. “We didn’t know a lot about them, but were told a captive insurance com- pany could help us reduce our costs and control workers’ comp and our future exposure,” says Borchard. After about a year of speaking with lawyers and insurers to learn more about how captives work and if they were a viable option, they met Everett Newman, who was able to explain the concept and help them cre- ate the Restaurant Franchise Captive Program (RFCP). Basically says Newman, managing vice president
at York Alternative Risk Solu- tions, a captive is “an insurance company created and fully owned by one or more non-insurance companies to insure the risks of its owners.” Its two primary benefits are the ability to recoup a percentage of your insurance premiums, and the abil- ity to exercise greater control over how claims are settled. He says captive mem- bers like that control almost as much as the money they get back. “Insurance companies make a lot of money on your business from the premiums you pay. So why not get into a program where you pay the same premiums, but instead of the insurance company getting the underwriting profits, you get them. You’re paying the same money but you’re getting a significant part back,” says New- man. “In our RFCP program, members 58 MULTI-UNIT FRANCHISEE I SS UE II , 2 01 7 on average have gotten back 30 percent of what they paid in.” Borchard, whose M&N Foods now operates 56 Carl’s Jr. restaurants, became a founding member of the RFCP, set up through York and serves as president. Borchard says that through the program, he’s been able to recoup about 40 percent of his annual premium of approximately $1 million Captives are not for the faint-hearted, however, nor for the impatient. It takes an initial investment that puts capital at risk, and takes about 4 years to start pay- ing off. But for a franchise organization that takes safety seriously and is willing to invest the money on the front end, the payoffs down the road can be tremendous. Mike Borchard Borchard says getting into the program was one of his best decisions as a business owner. In fact, he says, it’s done more to enhance his profitability than any other single thing he could have done. RFCP: how it began The RFCP, a program of York Risk Services Group, began in the midst of California’s “hard market” in 2004, when workers’ comp insurance rates were skyrocketing and many businesses failed or left the state. After Borchard and his partner collabo- rated with Newman to form the RFCP, they began writing insurance in July 2004 with $2.4 million in premiums. The fran- chisees’ primary goal was to gain control of their insurance costs through greater access to claims management and by fo- cusing on improved safety practices. And they succeeded: in the dozen-plus years since the program’s inception, they were able to drive down the cost of their work- ers’ comp, general liability, and property insurance to the lowest levels they’d ever experienced. Today the program, now in its 13th year, has 35 franchisee members with ap- proximately 2,000 locations in 30 states. Total premiums now exceed $22 million. Over its first 12 years, the RFCP had a loss ratio of 33.7 percent (industry norms are in the 55 to 60 percent range) and has returned more than $10.8 million in profits to its members. Returns in the captive are calculated based on each member’s individual ex- perience. If a member has no losses in a policy year, they can have their full loss fund premium returned, less any risk shar- ing among members. Investment income is distributed to each member on a pro- rata premium basis. Historical investment