Keystone helps agents provide ART solutions to middle market clients

An article in Rough Notes, Jan 2008, By George “Rusty” Capulet

Recently reported increases in captive insurance company growth at most U. S. and offshore domiciles are proof that captives continue to attract the attention of U.S. business firms. Noteworthy recent accomplishments include Vermont licensing its 800th captive and Arizona licensing its 100th captive. Additionally, most domicile regulators have indicated that growth is expected to continue through 2007, which is a clear indication that the captive movement continues to flourish despite the general softening in the properly and casualty insurance market.

Most experts are quick to point out that more than 50% of today’s commercial property and casualty insurance buyers now utilize some form of alterative risk transfer (ART) mechanism. The somewhat dated perception that the ART market is the exclusive domain of the Fortune 1,000 companies has been replaced by the realization that today’s market is being propelled by mid-sized accounts that sec the value proposition associated with ART market solutions such as captives. The reality for most agents is that this next generation of insured is driving the “new” captive market. However many agents may be falling short in delivering these cutting-edge solutions, notes Doug Deitch one of the four principals of Keystone Risk Partners an independent, alternative risk consulting firm that works with agents and brokers. “Some agents are missing these opportunities because they lack the needed expertise internally,” he says.

A new way of working

That’s where Keystone comes in says Deitch. “We work well with mid-sized, regional agents who don’t have the dedicated resources to craft these ART products for their larger customers.” As a result, Deitch notes, “We become a partner in delivering creative risk financing alternatives for the agency’s key accounts.” Keystone provides its alternative risk transfer expertise to those agents and brokers that lack general experience in the ART market as well as those that may need to supplement their ability to execute these transactions with a team of industry specialists. Keystone’s expertise centers on captive solutions, including single-parent captives, group captives, agency captives, segregated cells, and rent-a-captives. Keystone as a group “has done well over 300 separate transactions,” according to Andy Lewis, Keystone’s president, “so our team has seen most of the insurance applications of the various ART techniques.” Further, he notes, “We have a good understanding of what business owners arc looking to accomplish with a captive insurance program.” This knowledge helps Keystone to “unlock the value of the insured’s business by creatively integrating the owner’s non-insurance needs within a captive to maximize results.”

A helping hand

In order to assist their agent and broker partners, Keystone has developed an array of services, which together form “The Keystone.” John Naughton, principal, points out that “The Keystone” is a virtual product that is comprised of three distinct elements of expertise: risk transfer, risk mitigation and risk financing. Together, this product can provide agents with a value proposition for their larger clients. Naughton says that today agents will find that captives not only arc solving coverage and capacity needs but also providing financial benefits for business owners who are willing to assume some of their own risk.

Among other things, “Privately held companies can use a captive for estate planning as a natural extension of the core benefit of accumulating underwriting profit and investment income,” says Naughton. In fact, Lewis points out, “The Keystone structure has the ability to separate the policyholder from the actual beneficiary of any underwriting profits and investment income that accrues to the captive. This simple concept can offer an array of options to meet the insurance buyer’s specific needs.”

“The Keystone” places special emphasis on the risk mitigation aspects of captive programs since the claims portion of any insurance-related program typically accounts for about two-thirds of the overall program costs. According to Jay Peichel, principal, “Frequently we find that the insurance buyer has little idea what the true expenses associated with a claim represent and where those dollars are actually going.” A little known fact is that, in addition to claims handling fees, 20% to 30% of the actual claims cost can be attributed to vendor services such as managed care fees, medical case management and legal expenses. Keystone’s proprietary product analyzes the cost and utilization of vendor services, often repositioning them to improve vendor expenses and claim outcomes. The result can be a significant reduction in loss costs for customers.
“We drill down into the insured’s actual claims data to help both agent and customer understand how these elements impact claims results and how to maximize the use of this service platform going forward,” says Peichel. The mitigation aspects “can have a significant impact on the overall cost of loss-sensitive programs and offers ample opportunity for savings,” he adds.

Designed for mid-sized agents

Keystone is well suited to work with mid-sized agents. First of all, it has significant experience with a wide array of business segments and industry groups. Among the many industries served arc transportation, hospitals and health care, real estate management, construction, employee services and manufacturing. From a premium standpoint, while there are many variables. Keystone says their minimum size account would typically be the equivalent of a $1 million guaranteed cost premium for one or more casualty lines of coverage. However, Lewis describes “our sweet spot” as the $1.5 million to $3 million-premium workers compensation, general liability, auto liability and/or professional liability.

Deitch notes that buyers of all sizes arc finally seeing the value of ART market solutions. “Most insurance buyers and their agents are looking to get away from the ‘spread sheet’ mentality of the traditional insurance market,” he says. “Nowhere else in their businesses do customers plan in 12 month increments; however, the insurance industry has forced them into this situation.” Many business owners are trying to find bettor long-term solutions for their risk financing needs, and they can quickly sec how a captive can assist in attaining this goal. Additionally, agents and brokers reap the benefit of having their key customers in a long-term, customized captive program.

Novel approach

Keystone has built its practice on assisting agents to be in a position to offer highly complex, specialized ART products without the need to increase their staff. Keystone’s involvement is done exclusively via the agent or broker. Lewis states that “all of our touch points come from our agent or broker partners. Together we work as a team to craft solutions for the insurance buyer.” They view their involvement as a complementary service to the agents. With education on alternatives a key differentiator, Keystone tends to spend their time initially educating the agent/broker about the various aspects of the ART market and captives. Once the agent is comfortable, the firm must do the same with the buyer. However, the critical cog is still the agent. While this educational effort represents a time commitment on Keystone’s part, Naughton says that “we consider the education process part of our investment in the prospect and our agency partners.” In return, he points out, “Agents feel comfortable allowing us to work side by side with their customer.”

Naughton says that while Keystone has ample opportunity to provide its expertise in a consulting capacity, they are not necessarily interested in working on feasibility studies or on an hourly fee basis. Rather, they prefer to quickly assess whether a prospect can benefit from a long-term strategy such as a captive and, if so, they will work with the agent to develop a unique solution to address the prospect’s needs. “Our strength is in executing,” says Naughton, “and 99% of our revenue is derived from the successful completion of ART solutions.” He notes that Keystone’s best opportunities tend to originate with a simple phone call, and “we have become very good, very quick estimators of what this approach could bring to a particular prospect.”

Keystone Risk Partners currently has between 35 and 40 agents and brokers that they are working with at any one time. Keystone goes to great lengths to separate themselves from the traditional risk management consultants. In fact, Naughton says “we consider ourselves as an extension of the agent’s account team, as opposed to those that specialize in short-term consulting arrangements.”

At the end of the day, Lewis points out that Keystone and the agent have a similar approach to business, “Some of our opportunities don’t materialize.” Just like an agent, he notes, “we get paid only when the deal crosses the goal line.” Based on history, he points out, “Our breadth of experience and product portfolio is wide enough to make it worthwhile for an agent or broker to give us a phone call.”