In the world of captive insurance, financial diligence is more important than ever. Jennifer Burnham, who is the division vice president of business development and marketing at Great American Alternative Markets, emphasizes that companies looking into captives must be careful when choosing a fronting partner. It’s not just about availability; it’s about finding a partner that can handle risk effectively.
Burnham points out that financial strength is crucial. With new companies entering the market, it’s essential to determine if they can genuinely support and take on risk. Companies must avoid those that only seem capable of providing support on the surface.
This scrutiny goes beyond just peace of mind. It plays a significant role in how reinsurance deals are structured and whether they can be established at all. Burnham explains that understanding a partner’s financial strength can impact negotiations and the overall structure of reinsurance arrangements. Without a solid foundation, companies risk building their programs on shaky ground, which can lead to serious liabilities.
However, financial strength is not the only factor to consider. Burnham stresses that aligning product offerings strategically is also vital. In the changing landscape of captive insurance, it’s essential to clarify who will take on what risks and how much. This alignment is key to creating a stable, long-term structure.
If a company is willing to take risks, they should partner with someone who expects them to build their capital base. The benefits of such a partnership are significant. Captives can leverage not only fronting services but also the expertise and knowledge from the underwriting operations of their partner.
Yet, even with strong financial backing and good partnerships, issues can arise if the reinsurance and capital models are not clear or aligned with long-term objectives. Burnham insists that understanding the hybrid model—where risk is shared between the captive and the fronting partner—is essential. Clarity about the level of risk each party is taking is critical for effective capital deployment and future returns.
Moreover, being able to communicate openly with a partner during challenging times is vital. Whether it’s about collateral requirements, capital release timelines, or disputes over claims, this communication can make or break the success of a captive strategy.
Burnham believes that partnerships should not be purely transactional. Captives thrive when they have partners who are genuinely invested in their success over the long term. The relationship with the carrier becomes a strategic extension of the captive itself.
In her view, the captive model can have longer-term implications compared to traditional property and casualty insurance structures. Decisions made today can affect capital needs, reserve structures, and reinsurance costs for years to come. Early missteps can lead to significant financial and regulatory challenges down the line.
As the captive insurance landscape evolves, careful consideration of financial strength, strategic alignment, and transparent communication will be essential for companies looking to thrive in this complex environment.