Igniting Next Gen: How to Leverage Captives to Address Organizational Risks

Intro (00:00):
You're listening to a special episode of In The Public Eye podcast, Igniting NextGen for careers and risk management, where we explore all the exciting career opportunities and possibilities within the insurance industry. Here is your host. Karen Caterino.

Karen Caterino (00:18):
Welcome to Igniting NextGen for careers in risk management insurance. Our podcast series focuses on enlightening students and young professionals about all the exciting career possibilities in the insurance industry. I'm your host, Karen Caterino, Senior Vice President with Alliant Insurance Services. And our guest today is Courtney Claflin, Head of Insurance for Fluid Truck. Welcome to the show, Courtney.

Courtney Claflin (00:40):
Thanks, Karen. It's good to be on.

Karen Caterino (00:43):
Well, we're excited to have you, so tell us a little bit about yourself. What's your current role, and more importantly, really, how did you get your start?

Courtney Claflin (00:50):
That's a really good question. I got my start in captive insurance on January 25th, 1994, because that was the day that my son was born. And that's the day I said, I've got to figure out captives because I had just come home from a CPCU exam. And we talked about captives in that exam. And I said, I have to do that. And at the time I was an agent for a federated mutual insurance company out of Minnesota, and I was up in Minneapolis. I had my territory and my portfolio of federated products to sell. And I did that for 15 years and I said, you know what? I've intellectually got to go there. And that's the day I was introduced to captives. I left federated in 1998, joined an independent agency where I did both sales and taught myself captives with the help of a lot of captive professionals around the United States that I met at conferences and I'd pick their brains and I'd hit the streets and knock-on doors and say, hey, you want to buy a captive? And then in about 2000, somebody said, yes. So, I didn't have any idea what I was doing, but I managed to build that captive. And then one led to another and then one led to another. And I was fortunate enough to, over the years, build at least one of probably every major type of captive, single parent group association, health, things of that nature. I left the agency and went to a national financial services firm in 2011, became their national captive practice leader, built a captive practice for them. And then in 2015, the University of California system found me under a rock up in Minnesota. And I moved from Minneapolis to Northern California to work for the UC system in the office of the president. And then in January of 2022, the phone rang and a gentleman by the name of Jimmy Everhart was on the other line, and he said "Hey, we have an emerging, fast growing technology company, and we would like to have you join us as our Head of Insurance." And so, I packed up what little I had in California, moved up here in May and we're working on some real exciting things here at fluid and just having a great time.

Karen Caterino (03:08):
Well, that's great Courtney. So, I guess you were inspired a little bit, perhaps like I've been inspired by our kids to find a way to work in the insurance industry and a shared passion about a family being a motivating factor. Is your son in the business?

Courtney Claflin (03:23):
As a matter of fact, he's one of my brokers for our non-captive lines of coverage. And so, I get to work with him every day.

Karen Caterino (03:30):
That is so great. Let's start with what is a captive, what are some examples of how you've leveraged one to address organizational risks?

Courtney Claflin (03:38):
Yeah, it's a good question. A captive is a licensed and regulated insurance company, just like any other. Except that the beneficiaries of the underwriting profits and the corresponding investment income are the parent, the owner of the captive, which is a private company or groups of companies. So, the easiest way to look at it is if you buy in, you have risk, you have to finance your risk. And one of the ways that you can do that is to just self-insure it, put it on your balance sheet, make it a liability, pay cash for it. Another way is, is you can transfer that risk and you transfer that risk to insurance companies. Well, what if you owned the insurance company by owning your own insurance company, you drive further financial efficiencies into that arrangement. So, the money that is sitting aside, waiting for you to pay out in a claim, you drive investment income from that. Another example is, is let's say, we did this at UC. We spent tens of millions of dollars a year on employer paid and employee paid life insurance.

So, I did an analysis, went to the insurance company, and said, hey, I want to reinsure you. You keep doing everything you do. You take in the money, you pay the claims, you issue the policies, etcetera, but you seed the rest of that money, that's left over to our captive insurance company. And consequently, we get to keep the underwriting profit on that. And so, captives are insurance companies, but they're owned either by larger entities, like the UC system, General Motors, you know, the fortune 1000, probably 90 plus percent have captives. Or in the middle market business, you get groups of companies, high performing companies that come together and they build a group captive because they're not big enough or diverse enough, themselves individually to do it by themselves. So, they'll come together as a group and say, Hey, we're all, like-minded, we're all high performers. We're tired of subsidizing with our premium dollars, the low performers. And we want to keep our own money. And so, captives, as I said, incorporated licensed regulated insurance companies. They're built by groups of private companies or larger, more diverse organizations with which to more efficiently finance their organizational risk.

Karen Caterino (06:03):
In your view, what do you see as some of the challenges? You mentioned private companies adopt captives, but more so maybe in the public entity space of why they aren't embracing captives and perhaps maybe share some of your experience with getting the UC program up and running and, and how you were able to collaborate and get stakeholders on the same page.

Courtney Claflin (06:24):
Yeah, that's a good question. And I think the root of the, I wouldn't call it a problem, but the root of what you just brought up is the fact that, captives are risk financing. And a lot of people confuse that with risk management. And it's my opinion, and I'm pretty vocal about this, is financing risk is a different discipline than managing risk. And I think the struggle is, is that a vast majority of captives and there's lots of them out there. I mean, I was talking to another university system, a couple of them over the last month, is that risk managers are running these captives today and they have big jobs. It's a big job to manage the risk of a university or a university system. And then when you add onto that, how do we best utilize a captive? It becomes kind of a time bomb. There's just not enough time to do both to a high degree of success. And so consequently captive utilization usually falls behind because risk management is a higher priority. So, I think you see a lot of that out there. And in terms of growing it, if you teach people that this is the same money, it is the same risk, but if you finance it differently, the net cost to the organization is reduced and oftentimes reduced significantly. And then when you add in components, such as investment income float, you've now taken an expense and turned it into a source of revenue. So now the company has created a new source of revenue. So, if you keep that, that simple, you know, I always tell my audiences, I flunked eighth-grade math, I'm a hockey player, right? If I can do this, you could do it. It's just that you can't overcomplicate it. And if you take the time to just break it down to its basics, same money, same risk, just finance differently. You're driving efficiencies with investment income until the claims payout, you get to buy your reinsurance wholesale instead of retail, because insurance companies get to buy insurance from special stores for lack of a better analogy. At where even somebody as big as you see couldn't get in because they're not an insurance company. So, if you teach and you sit down with someone.

So, let's say I go to HR to talk to them about the life insurance. And you know, the first thing is stay in your own lane and stay out of my sandbox. But the second thing is, is, wait, we spend this much money. If we finance it differently, here's the net result and we're saving 30%. Well, reasonable people given the same information and have come to reasonable conclusions. And so consequently, if you take an approach of teaching as an approach of, hey, we have to do this, then people are much more receptive to letting their guard down and learning more about it. And if in fact, you know, what we do is we deal with a lot of numbers, barring any significant changes in operations and exposures what's happened in the past is going to happen in the future. And so, when you lay it out, you put a feasibility study down in front of them that says, here's a snapshot of the last five years. If we would've been in a captive, this is how much money we'd still have in our pocket. Then people have their “aha” moment.

So, socializing and executing on all of these different risk financing arrangements is really much more about teaching than it is about selling or forcing people to do something. I think if you take that mindset into it, your audience is much more receptive, number one, and number two, I always said, hey, this is your money. My job as a captive owner is not to make money off of you. My job as a captive owner is to design risk financing arrangements that allow you to keep more of your money, and therefore you can take that money and do what you want to do. You can make capital improvements to your business from an employee benefit standpoint, an HR standpoint, you can launch which we did at UC. We can launch new programs where you've got the money to make the investment, to build it and launch it. And that's going to provide long term benefits to the employees. So, I think that, that philosophy is really worked out for me, and you know what, touch wood, we've had a lot of success with that.

Karen Caterino (11:05):
Well, you certainly have. And I think the UC example is really a fine one of how you start with something like an idea and how can you reinsure it? How can you maintain the dollars so that they're reinvested and saved by the university, and you know, how do you grow it to make it more valuable to all the key stakeholders. That's a great story. Well, it has certainly been great talking with you, Courtney, and thank you for your time on the igniting next gen podcast today.