Multi-Unit Franchisee Magazine Issue II, 2017 | Page 62
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.
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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.