Captive Planning and Enterprise Risk Management

Captive Planning and Enterprise Risk Management

A recurring theme nowadays in risk management circles is "Enterprise Risk Management" (ERM). ERM extends the focus of traditional risk management beyond protecting an enterprise's tangible assets, e.g., a warehouse, to enhancing a company's overall business strategies and reducing its overall risk. It is widely understood how fire or theft or a lawsuit against an insured can affect the value of tangible physical and financial assets. For this reason, coverages for such are often the first to be purchased. It is less well understood how the value of intangibles such as distinctive brands, technology, trademarks and trade dress, unique marketing strategies, innovative processes, and other intangibles can be impaired, resulting in a less understood - but no less real - loss to a company.

Imagine the monetary effect on AYDS, an appetite-suppressant candy which enjoyed strong sales in the 1970s and early 1980, before the subsequent AIDS epidemic. The confusion in the marketplace from the similarity of names destroyed the appetite suppressant product. Likewise, imagine the adverse effect on hotel resort owners in Mexico that the recent swine flu epidemic caused. Today our clients' captives write policies that cover such intangible assets, including policies that provide reimbursement for adverse publicity, loss of intellectual property rights or loss of services.

Another example of a possible captive insurance policy is, for example, for a franchised, new car dealer protecting against the loss of its major vendor, e.g., General Motors, which decides to abandon the Saturn or Pontiac business. Or imagine insuring a Chrysler dealer against a wholesale reduction in the number of franchised dealers. All of these can be insured coverages under a captive/alternative risk planning program.

The objective of ERM is to manage the risks that impact all sources of a business' value at the strategic level. The overall effect of a well implemented ERM program is the reduction in risk with the result that the company has a stream of future income not impacted by insured risks. Captive insurance companies are usually an important component in these planning strategies.

At Capstone, ERM is an underlying theme in the evaluation of alternative risk/captive planning. While the traditional insurance market continues to introduce new and broader coverages from time to time, such happens at a slow pace. More traditionally, the conventional coverage insures the business against a suit for its infringement on another's trade dress. A well designed captive insurance program protects the business from events that impact the earnings stream by protecting a company's intangible and tangible assets, not just the business against liabilities which are usually the subject of conventional coverages.

Capstone Forms 100th Capstive Insurance Company

Capstone Reaches Milestone - 100th Captive Insurance Company Formed

We'd like to thank our valued clients and referral partners for a productive and successful
2010. Last year, Capstone formed its 100th captive insurance company for our growing base of middle market clients. We've certainly come a long way since forming our first captive 14 years ago.

Our clients represent a diverse range of businesses operating in a wide variety of industries. Headquartered in over a dozen states, our clients extend from the east coast to the west coast and from the Canadian boarder to the Gulf of Mexico. Our continued growth is a reflection of the broadening acceptance of alternative risk planning beyond the larger, publicly held companies where captive planning is commonplace. In addition, a number of our clients have formed additional captives--or expanded the scope of their current captives--in response to the growth of their operating businesses.

To our friends that postponed forming a captive insurance company in 2010, now is an ideal time to revisit alternative risk planning. Early in the calendar year is the best time to begin implementing this planning. Middle market companies will form more captives this year than ever before.

To our new clients that formed their first captive in 2010, congratulations! You are now among the growing number of savvy businesses that are enjoying the significant benefits of captive planning--benefits that have long been realized by large, publicly-held companies.


When Threat of Illness Interrupts Business Captives Provide Loss of Services Coverage

One of the common coverages that our clients' captives underwrite is the Loss of Services policy. The coverage reimburses the insureds (the operating companies) for the unavailability of the services of key employees for any reason--whether on account of death, disability, retirement, or illness.

By way of example, if a key employee quits to join a competitor, coverage would kick in.  The company would also be reimbursed in instances where the employee is permanently disabled, just quits for personal reasons, or is fired.

In all instances, the loss payee is your company, not the employee.  The policy reimburses the insureds for the costs of hiring and retraining the key employee and in the case of a revenue generator (e.g., a salesman), for the lost future revenue.

Under one form of optional endorsement, the Loss of Services policy includes temporary loss of services of five or more employees for more than three business days on account of an outbreak of a recognized epidemic such as Swine Flu.


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