C A P T I V E I N S U R A N C E BENEFITS AND RISKS Mike Borchard, who co-founded the Restaurant Franchise Captive Program in 2004, on the pros and cons of becoming a member of a captive insurance company: BENEFITS 1. A captive is the only way to turn what presently is only an expense on my P&L into a potential profit center. Any money that I pay in I have the potential to get back. My company’s return is over 40 percent. That’s a fair amount of return. In 5 years that’s not a bad deal. So it’s financially lucrative. 2. When you get involved in a captive you have the ability to create a much safer work environment. We have a very intense safety program, and I think a safer employee environment is a happier employee en- vironment. And because you have money at risk, you’re really paying attention to safety, and everyone is engaged in the program. 3. From an adjusting standpoint you have a lot more control, so there are fewer opportunities for what I would call runaway claims. What we try to explain to people, and what happened to me, is that when you’re in a fixed cost program with an adjuster, as I was in the state fund, I had no control on claims that should have been closed out and gone. In the end I paid for it with my mod rate. With a captive you have the ability to keep your mod rate lower and make your adjusting far more effective. As a lawyer and an operator, I really enjoy that piece. 4. When you’re part of a captive, you’re far less subject to the fluctuations of the market. Our captive is judged by how we’re doing. So if we’re doing well, our increases are less, which provides a little bit of a hedge against a runaway market. In a hard market the best place to be is in a captive. RISKS 1. The biggest is that a captive entails some extra financial risk and is not a short-term venture. If you think you’re going in for a year or two or three, then a captive is not for you. You’re making a commitment to put some capital at risk and be in it for a minimum of 5 years. 2. You have to be willing to put some capital at risk and some people don’t want to do that, to take the risk of someone hav- ing a terrible injury. There’s always the potential of having some larger liabilities, of having more money at risk than you would if you’re in a fixed-cost program. 3. You have to work at being safe. In a fixed cost program if you get lazy it’s not going to hit your P&L that year. Whereas in a captive if you’re lazy you will feel the effects right away. So you have to be willing to make a commitment that you as a company are going to really promote a safe environment and work hard at safety in your business. 60 MULTI-UNIT FRANCHISEE I SS UE II , 2 01 7 returns are in the 2 to 4 percent range. “Because 60 percent of what they pay in their premiums goes into the loss fund to pay claims, that is really their money,” says Newman, “and to the extent that they don’t pay claims they get that money back.” Of the 40 percent that goes to expenses, about 25 percent goes to insurance and reinsurance companies, and 15 percent to claims management, pro- gram management and other opera- tional costs such as safety programs, Everett Newman monitoring exist- ing members, and screening new ones. “We decline a lot more people than we accept,” says Newman. Other brands of franchisees in the program include Burger King, IHOP, Jack in the Box, KFC, Long John Sil- ver’s, Qdoba, Round Table Pizza, Sizzler, Sonic, Taco Bell, TGI Fridays, Wendy’s, Wingstop, and Zaxby’s. York provides the claim adjudication and claim oversight for the captive, with full input and required approval from members before settling a claim. “We serve at the pleasure of the members and are accountable to them,” says Newman. For example, when a member has a claim that York is trying to settle, York sends them an email requesting settle- ment authority. That email contains two documents: a Word file that outlines York’s strategy for settling the claim, what they think the value of that claim is, why they want to settle it, and why they want to settle it for that amount; and an Excel document showing how that settlement was derived, and the same for the reserves. “It’s very transparent,” says Newman. Compared with traditional insurance companies, he says, “There’s a lot more transparency in terms of how claims are reserved and settled. There are no surprises.” Newman says many insured parties are frustrated with their carriers because there’s not that level of communication. “In this program, because the loss fund money is really your money, you get to participate in that decision,” he says. Members have the opportunity to provide input and ask questions. “That’s a huge benefit to the members,” he says. Once consensus is reached, York proceeds to settle the claim.