(Video) Agent & Broker Partner Guide:
Captive Insurance, Commissions & Next Steps

3F Intelligence Series | AgentsBrokers | Transcript

‍

Robert O'Shaughnessy (0:03)

I'm Robert O'Shaughnessy, and I'm here today with Jonathan Strike and Patrick Johnston, co-founders of 3F Captive Services. Jonathan earned his MBA at Stanford, and Patrick earned his MBA at the Kellogg School of Management. Together, they co-founded 3F Captive Services to offer captive insurance, which is what we're here to talk about today. Specifically, we're talking to insurance agents and brokers. We're going to get to what I would call a very generous commission program, but before we go there, I wanted to talk about what captive insurance is, how it is a value add to insurance agents and brokers, and what the partnership looks like. So to begin, I'd like to start with you, Patrick, with a definition. What is captive insurance?

Patrick Johnston (0:49)

Simply put, a captive insurance company is a fully regulated and formed insurance company that insures the risks of the parent company, or parent companies, that participate in and own that captive insurance company. It's an enhancement to their traditional insurance. It's a value add that a broker or agent can bring to their clients, because within a captive you can form policies that cover risks that fall outside of the traditional policies. You can also cover deductibles, limits and sublimits.

Robert O'Shaughnessy (1:22)

Jonathan, this question is for you. Let's imagine there's an insurance agent with a great client, a long-term relationship, decades long. What would you want this prized client to understand about captive insurance?

Jonathan Strike (1:39)

It's a good question. In the existing commercial markets, you're seeing rising premiums, reductions in coverage, and increased exclusions, which is making the overall market pretty tough. What I would say to the broker and agent is that a captive insurance program can fill the gaps in those coverages. It can fill the gaps in the exclusions, and it can also cover risks that are not insurable in the traditional markets. Some insurers have been pulling out of markets altogether, or eliminating certain coverages, and that's where a captive insurance program comes in.

Robert O'Shaughnessy (2:22)

Got it. Patrick, how would you frame the opportunity? How would you position it?

Patrick Johnston (2:29)

It's not an option between traditional insurance and captive insurance. The agent or broker needs to understand that for everything that falls outside traditional insurance, their client is self-insuring, by definition. The question isn't whether they're self-insuring. It's whether they're doing it efficiently or not, and a captive insurance company allows that. So from the broker or agent's standpoint, they can put their client in a much better position, not only from a risk standpoint but also from an asset retention standpoint, with a captive alongside the traditional policies.

Robert O'Shaughnessy (3:08)

Patrick, what does this opportunity look like from where a broker is currently sitting?

Patrick Johnston (3:12)

An agent or broker only has so many policies they can bring to their clients, and these are policies put out there by large insurers. This is a whole new offering they can bring to their clients. And the beauty of it is the policies are specifically designed to insure just the risks of their client, so they get to customize those policies to best fit the risk of the business. The agent or broker is not selling anything new. They're just introducing us to their client so that we can work with their client. And if they're a good captive candidate, we end up at the end of the process with a company that is much stronger economically and much stronger from a risk management standpoint.

Robert O'Shaughnessy (4:01)

So you're showing them something they would already qualify for.

Patrick Johnston (4:05)

The agent or broker probably knows better than anyone which of their clients are best suited to a captive, in terms of how large they are, what their insurance spend is, and how much risk that company is facing that the agent or broker can't cover for them. Fortune 500 companies have been using captive insurance for over forty years now, I think it is. You're bringing them a whole new way of managing their risk, and it's not new. It's important to know that there was a study out of Vanderbilt recently that said across all P&C lines, something like 50% of all claims are denied, but when challenged, only 2% of those denials are upheld. And then, of course, from the broker or agent's standpoint, not only are they helping their client, but they can also earn up to $270,000 in commissions for a client who eventually signs up for a captive.

Robert O'Shaughnessy (5:01)

That's really enticing. Two hundred seventy thousand dollars is sitting on the table for doing something that's already going to bring value to their existing clients.

Jonathan Strike (5:10)

And it's not a ton more work for the agent and broker. At the beginning of the process, we have an initial conversation, and from that conversation we get a sense for whether or not a captive will make sense for the client. Then we ask to review the client's, or the potential client's, existing commercial policies, and we run an analysis to see where a captive insurance program may best fit for them. So the agent or broker isn't really doing much more work. They're managing the relationship and providing us with their client's insurance policies, subject to the client's approval, of course.

Robert O'Shaughnessy (5:55)

What kind of feedback have you gotten from the agent and broker community on the program?

Jonathan Strike (6:00)

It's generally been very positive. Even if they don't move forward with us, there's a lot of value in having the initial conversations and running the analysis on the existing policies, to give them a better picture of their overall risk profile.

Robert O'Shaughnessy (6:16)

Tell us a little bit about what running that analysis looks like. What is that?

Jonathan Strike (6:20)

It's pretty straightforward. We take their existing commercial policies. An insurance binder can run several hundred pages long, which, as you might guess, clients don't always fully read. We review those policies and analyze them, and say, okay, based on these coverages, here's where some of the gaps in your coverage are. That's number one: where you may be exposed and may not know about it. The second piece of the analysis is giving them an understanding of where a captive insurance program might help them.

Robert O'Shaughnessy (7:00)

So it's a value add for the relationship.

Jonathan Strike (7:03)

It is. Even if they don't move forward with us, the client and the broker have a greater understanding of the client's risk profile.

Robert O'Shaughnessy (7:12)

So the opportunity potentially exists in the book, in the relationships the insurance agent or broker already has.

Jonathan Strike (7:21)

Correct. That is exactly where the real opportunity is. Typically, when we have discussions with brokers, we say take a look at your top ten or twenty clients you have good relationships with. We may have an initial discussion with the agent or broker to understand the parameters, and they'll have questions like, can you cover this industry? Does this risk make sense? We have those discussions, and then we can get into the policy analysis.

Robert O'Shaughnessy (7:53)

So now I'll ask some questions as if I'm an agent or broker and we're having a phone call. Question number one: does this compete with my existing book?

Patrick Johnston (8:04)

No, it does not. It goes to your existing book, your potential clients, if they go forward with a captive. And we won't go forward with forming a captive unless we are certain it's going to have economic and risk management benefits for the client. If they do that, that company on the other end is in a much better position from a risk management standpoint and from an economic standpoint going forward.

Robert O'Shaughnessy (8:27)

Again, an agent or broker asking: this feels really complex. I don't want to get into something super complex, and I don't want to explain this super complex thing to my client.

Jonathan Strike (8:39)

The question I would put to the agent or broker is, do you want to lean into this? We'll help you and do whatever we can to get you up to speed on it. There's a very wide spectrum of knowledge among the agents and brokers we talk to. On one end, there are agents and brokers who have done their own research on captive insurance. They've been thinking about it, they want to do it, and they think they can add value to their clients with it. On the other end, there are agents and brokers who have very little knowledge about it and are curious to learn more. It can be a little bit daunting, because there is an education process.

Robert O'Shaughnessy (9:22)

An element of this that might feel complex, or even risky, is the 831(b) component. Do you want to address what that is and whether or not it's a risky thing?

Jonathan Strike (9:34)

Sure, I can address that. 831 is a section of the IRS code related to captives. There are a few different tax regimes for captive insurance programs with the IRS. The most common are 831(a) and 831(b). The reason you hear a lot of chatter about 831(b) is that they're very tax advantaged. Regardless of whether a client goes with an 831(a) or an 831(b) structure, all the premiums paid into either of those captive insurance programs are fully tax deductible for the operating business. The difference is that with 831(b), the premiums paid into that entity are not taxed, so there's more IRS scrutiny on 831(b)s than on 831(a)s. Part of our job is to manage that process effectively so that you don't run crosswise with the IRS.

Robert O'Shaughnessy (10:32)

Again, asking as an insurance agent: does my client own something real, Patrick?

Patrick Johnston (10:40)

Yes. They own an insurance company and they control that insurance company. They own it 100%, and that's important to know. What that means for your client is they directly enjoy the underwriting profits of the captive insurance company. When they pay the premiums into their captive insurance company, year after year those premiums stay behind, net of any losses, and they compound year after year. So your client directly enjoys the benefits and economic gains of keeping their losses low and managing their company effectively.

Robert O'Shaughnessy (11:22)

In your experience, has anyone had some hesitation, but then walked through the analysis process and gained insight or understanding from it?

Jonathan Strike (11:35)

The initial discussions are all a little bit academic. But once we get into the weeds and actually start running analysis on their businesses and where a captive can fit in, there's a series of aha moments that occur during the process.

Robert O'Shaughnessy (11:54)

Got it. So the insurance agent or broker brings the opportunity to the table, and then 3F takes it from there?

Jonathan Strike (12:06)

Yes. The process works like this. Typically we have an initial discovery call with just the agent or broker. We introduce them to our business, how we work with folks, and have a high-level conversation about the kind of value we can add for them. Then we can get more into the weeds on the industries, and, depending on what the broker or agent brings us in terms of the problems their clients are facing, we discuss that. It's still pretty high level; without tangible information it's hard to dig in. After that, if they're interested, or they have a couple of clients in mind who want to work with us, we set up a call with the three of us: us, the agent or broker, and the potential client. Then we start digging in a little more, and on that call we ask the client, would you be comfortable sharing your existing commercial policies? Then we run an analysis and see where a captive program might fit.

Robert O'Shaughnessy (13:17)

Insurance agents are looking at their book, looking at their CRM, and thinking about who might be a fit. How would they evaluate their book and understand whether there's a client in there who could be a fit for a conversation?

Patrick Johnston (13:29)

Sure. There are a number of things to look at, and it could be any one of these things or any combination. A company that has, say, north of $250,000 in insurance spend across all lines of coverage. A client that's had a good, favorable loss history over the last five years; they're obviously benefiting the traditional insurance company and the pool, not themselves directly. Maybe a company that has had some claims denied and is frustrated that way. A company where their premiums are rising as their losses are going down; that's another great client. And finally, any companies that are experiencing a lot of growth. A lot of times that growth gets them out ahead of their coverage, so they're taking on more risk without really understanding it, and sometimes they find out too late.

Jonathan Strike (14:20)

If they've been working with their existing clients for a number of years, they're going to have a deeper understanding of their business, so they'll be able to understand more quickly whether a captive insurance program might be a good fit.

Robert O'Shaughnessy (14:34)

Patrick, what do I say to a client? Give me the conversation.

Patrick Johnston (14:39)

There's no sense talking deeply about a captive insurance company and what it means without understanding the parent company and how a captive might fit. That's the starting point. If it's not a fit, no problem. We can still do the analysis for them and let them know where their risks really lie. If it is a fit, then we take the relationship from there and work on education, getting them to understand how this would work with their company, and so on.

Robert O'Shaughnessy (15:04)

Jonathan, what happens after that?

Jonathan Strike (15:08)

Once we have the initial discussions with the agents and brokers, we ask them, or encourage them, to look at their book of business to see if there are any clients for whom a captive program might make sense. If that's the case, after that initial conversation we like to schedule a call between the three of us: the client, the broker and 3F. We discuss their business, and in that conversation we get a pretty clear idea of whether a captive program might be a good fit or not. If it is a good fit, we always request that they send us the client's existing commercial insurance policies. From there we do an analysis of those policies, and the goal is twofold: one, to understand where the gaps in coverage are in their current policies, and two, where a captive insurance program might fit for their business.

Robert O'Shaughnessy (16:08)

So to summarize, there are two outcomes. One outcome could be: the structure makes sense, let's explore it. The other could be: this doesn't make sense, but now I have more information. In either outcome, the conversation makes sense and the broker looks good. They don't need to understand all the nuances about 831(b) and so on. They just need to know how to understand what's in their book and whether there are conversations worth having.

Jonathan Strike (16:43)

The only cost is their time. There's no dollar spent; we're not asking for any payment for that preliminary analysis. Most agents and brokers want their clients to be in a good position from a risk management perspective, so it's in the interest of both the agent or broker to have the company in the best position to manage its risks. The second business case for agents and brokers is that we offer a commission structure that's above and beyond what they get from the client's existing commercial policies. This is important. We have a commission structure that pays $20,000 up front for any referrals that sign up with us, and then up to $50,000 a year for five years, for a total of $270,000. So it's an additional revenue stream on top of their existing book of business.

Robert O'Shaughnessy (17:35)

Let's dig into that commission program a little more. You said it's $20,000 up front, and up to $270,000 over five years. So they get to be a hero, and they get to put this cash in their pocket.

Jonathan Strike (17:50)

Correct. It's as simple as that.

Robert O'Shaughnessy (17:53)

That sounds pretty enticing.

Patrick Johnston (17:55)

And their clients are better off.

Jonathan Strike (17:57)

And their clients are better off, yes.

Robert O'Shaughnessy (17:58)

Patrick, what would you say to an agent or broker who might have some hesitation but is thinking about finding out more?

Patrick Johnston (18:07)

I'd say call 3F Captive Services. Let's have a discussion, and let us talk to you about how a captive might work for your client and how your client is better off. With our analysis, even if they never work with us and never spend a dime with us, they're going to understand their risk better. You potentially could make a lot of money on your commission, but at the end of the day, it's about serving the client. And the client is better off even if they never work with us, because they have better information about their risk. And if they do work with us, we will make sure they're better off with a captive in place than not.

Robert O'Shaughnessy (18:41)

Great. You said give us a call. You can find all the information about 3F Captive Services on the website, 3fcaptiveservices.com. It has contact information as well as more information about how captive insurance works and how 3F Captive Services is structured. So go to 3fcaptiveservices.com to learn more. With that said, before recording today we asked whether there were any questions, and we did get some from the agent and broker community. Patrick, a question from LinkedIn: does this compete with my existing book?

Patrick Johnston (19:17)

The answer is no. For your client, it lives alongside the traditional policies and rounds out the risk management strategy for that company. It also supplements the traditional insurance policies they have: it can cover deductibles, limits and sublimits, and then fill in gaps with difference-in-conditions policies.

Robert O'Shaughnessy (19:43)

What does the referral compensation structure look like?

Jonathan Strike (19:46)

As we've said, we're not replacing the client's current coverages, so you're still making your commission on the existing policies you've already placed for the client. Our program is a supplement, and therefore our commission structure is another revenue stream for your business. What does that look like? We pay up to $270,000 for each client referral that ends up signing with us, and there are a couple of components. The first is a $20,000 setup fee, or initial referral fee, and that happens when we actually form the captive and do the work to do that. Then there's an annual commission structure for five years that pays up to $50,000 a year. So the total is up to $270,000.

Robert O'Shaughnessy (20:37)

I'll ask this one to you as well, Jonathan. Do 831(b) questions raise any complications or red flags?

Jonathan Strike (20:45)

No. We get this question a lot. As we mentioned before, there are a couple of different IRS codes that regulate how captive insurance companies are taxed. 831(b)s are the most tax-advantaged structure we work with, and therefore can receive more scrutiny from the IRS. But that's where we come in: we manage things in a way that doesn't invite additional scrutiny.

Robert O'Shaughnessy (21:19)

Patrick, are there any industries where this would be particularly sensible to bring to a client?

Patrick Johnston (21:26)

Sure. It really works for all industries, but some industries we've found particularly well suited to captives are medical and health spas with multiple locations, transportation and logistics, construction and general contractors, and agriculture. Cannabis is also very, very good.

Robert O'Shaughnessy (21:52)

Great. And the inverse of the previous question: are there any industries this does not make sense for?

Patrick Johnston (21:59)

I can't think of any offhand. But I would say that within a certain industry, if the traditional market serves those companies very, very well, meaning there's not a whole lot of risk outside the traditional policies offered, and those traditional policies are priced competitively, then that's a less inviting market for captives.

Robert O'Shaughnessy (22:27)

Patrick, asking in the voice of an agent or broker: I don't know much about captive insurance. Do I need to?

Patrick Johnston (22:34)

The answer is no, you don't. We handle all of that, and we handle education. We're happy to educate you if you want to learn more. I'd also invite you to go to our website and look at our blog, because we have a great number of articles, many of them specifically meant to educate brokers and agents about captive insurance, and many about how captive insurance works for different types of companies and different industries.

Robert O'Shaughnessy (22:59)

Jonathan, how quickly can a referred client get their analysis?

Jonathan Strike (23:04)

The preliminary analysis, where we review their existing commercial policies, we can do in under a week. It's a pretty fast turnaround.

Robert O'Shaughnessy (23:13)

Jonathan, what if a client asks super detailed tax questions that I can't answer?

Jonathan Strike (23:20)

That can come up. First, we're not CPAs or accountants, but we certainly know enough about how the taxes work that we can answer some relatively detailed questions. If we start to get really in the weeds, we work with a number of tax specialists who specialize in captive insurance programs, and we can use them as a resource. We're also happy to talk directly with the potential client's CPA firm, or put their CPAs in touch with the tax specialists we work with.

Patrick Johnston (23:57)

It's also important to know that your accountant doesn't need to know anything about captives either, because when you work with us, part of the fees you pay in your captive cover the accounting work for the captive, and that work is all done by CPAs who have deep knowledge of captives.

Robert O'Shaughnessy (24:15)

Is there anything we missed? Are there any questions you would have liked to be asked and would like to answer now?

Jonathan Strike (24:23)

I'm not sure there are any new questions, but there are some important takeaways I'd like agents and brokers to walk away with. One: captive insurance programs with 3F do not replace your current book of business. Anything we do sits alongside your existing book. Two: because we sit alongside your existing book of business, you keep the commissions on it, and if you work with us, you get another revenue stream for your business. And three: we handle everything. You don't need to be an expert in how captive insurance programs work, and you don't need to be an expert in the tax element.

Patrick Johnston (25:11)

I would just add that it's important to know your clients all self-insure. It's not whether they do it; it's whether they do it accidentally or mindfully. This tool allows your clients to do it mindfully, in a way that leaves them in a much better economic situation, with their company facing less overall risk.

Robert O'Shaughnessy (25:30)

We've got 3fcaptiveservices.com for more information. Jonathan and Patrick, thank you very much for your time.

Patrick Johnston (25:36)

Thank you.

‍