CAPTIVE INSURANCE
FROM DONUTS TO DOLLARS
John Batista , a Dunkin ’ Donuts franchisee with 23 units in Rhode Island , grew up in the brand . His father bought into Dunkin ’ in the early 1970s and passed his stores down to Batista ’ s older brothers and sister . After college , Batista became a franchisee himself .
He first heard about captive insurance from his brothers , who attended a presentation by a broker about 4 or 5 years ago . “ I ’ ve known Dunkin ’ Donuts my whole life , but I knew nothing about insurance except how to file claims and pay premiums ,” he says . “ It was a really foreign concept to us , so we started doing some research .”
As they learned more about it , captive insurance made sense on several levels . But Batista had to overcome two big concerns : 1 ) it required a fairly substantial capital investment that put his money at risk , and 2 ) his lack of knowledge about insurance . “ But I learned quite a bit and was able to overcome that through research and interviews ,” he says .
What Batista did know was that he wanted the captive to be member-owned and exclusively for Dunkin ’ franchisees who had the same issues and could share best practices about workplace safety to keep claims down . As he investigated further , he found two Dunkin ’ franchisees in New Jersey who had already started just such a captive .
“ They had done all the legal work and only needed more franchisees to bring premium into the mix because insurance companies need a certain amount of premium to make a captive viable ,” he says . “ It was fortunate for us that we found them , and fortunate for them too because they needed members .”
He describes the company they formed , Alternative Solutions Insurance Company ( ASIC ), as a “ small , fledgling captive insurance company that just got started .” ASIC began writing policies in November 2015 . Today it has 8 franchise groups as members with about 175 total units and will have aggregate premiums of around $ 2 million by year-end .
There are many different kinds of captives , he says , and since joining ASIC , he ’ s helped create the structure of the company . “ Our captive is somewhat unique in that we offer franchisees the option to buy shares in the company and share in profits down the road , or just become a member of the captive and buy insurance through us .”
For Batista , the two biggest benefits of being in a captive are :
1 ) More money . For example , he says , if you ’ re in a traditional insurance program performing well and your losses are low , at the end of the policy term the insurance company keeps whatever profits remain . In a captive , those profits are distributed back to its members . “ That ’ s
the biggest reason why anyone that could be in a captive should be in one ,” he says .
2 ) More control . “ When you have more control over the claims handling process , you have more control over things like what reserves are set at , which can be very important because an insurance company that has reserves can write off those reserves and invest that money ,” he says . Captives , he says , are generally a little bit more conservative about reserves . “ You set them a little bit lower because they affect us as the client in a lot of ways . Higher reserves lead to increased premiums in subsequent years , and they also affect our insurance mod , which is used to calculate premiums .”
Secret ingredient
“ When you are in a captive , you are hoping to receive profits back in the long term . The only way to ensure that is to manage your losses ,” says Batista . “ So when you ’ re in an insurance program like this , you manage safety better because you want to make sure you ’ re earning that profit back . In turn , you ’ re running a safer business for employees and for customers .”
If you ’ re not in a captive and have a claim , he says , you can take the attitude that the insurance company will pay for it . Not so in a captive . “ When you ’ re the insurance company paying for it , you look at claims quite a bit differently ,” he says . “ The secret ingredient to a group captive like ours , where you have multiple owners , multiple members , is that you start sharing best practices , looking to each other for advice , and working collectively as a group to manage losses . It becomes a very big part of what you do .”
The potential downside , he says , is that the members of the captive take on risk that had previously been covered by an outside insurance company . “ As an insurer , the risk is large losses that could lose money for the company ,” he says . “ If there is a risk , it ’ s the insurer ’ s risk of losses .” Also , there ’ s a little bit more work involved than paying someone else to manage your insurance , he says , depending on how involved you want to be .
There ’ s also the fact that members tie up capital they could have used for growth and don ’ t see returns for years . “ Captive insurance is definitely a long-term play . It ’ s not something you can bounce in and out of ,” he says .
“ For us it ’ s as simple as this ,” says Batista : “ As a business owner , we face so many headwinds , and they seem to grow in quantity and strength every year . So if there ’ s an opportunity to look into anything that will allow you to retain more profit or create more profit , it really behooves you to do so .”
But in the end , the upside of getting back 30 to 40 percent of his annual insurance premium convinced Batista the risks were worth it . With ASIC now in its second year , time will tell if his investment pays off .
62 MULTI-UNIT FRANCHISEE ISSUE II , 2017