Starting a Captive Insurance Company.

Since reshaping our business model four years ago, ASAE Services, Inc., has been restructuring its sponsored programs and adding alternatives that provide better benefits and increased stability for ASAE's members. Among the programs with much potential to help members is the new ASAE Insurance Company (AIC), a sponsored association captive insurance company.

An association captive is an insurance company that is owned by an association or its members and created to provide insurance exclusively to the association's members. Sponsored captives are identical to association captives with one significant difference: For a fee, the owner and creator of the captive--in this case, ASAE Services, Inc.--may establish separate risk-assumption units or cells for other organizations to use. Through these cells, associations can provide reinsurance for their own sponsored-program operations. The owner-sponsor may insure or reinsure the exposures of one or more of the units.

Using the expertise of our senior adviser and insurance consultant, Ed Armstrong ([e-mail]), ASAE Services, Inc., recently unveiled its business plan to create a sponsored association captive insurance company in the District of Columbia. The business plan provides not only a captive insurance facility for ASAE's sponsored insurance programs but also captive benefits, including underwriting and investment income, to qualifying member associations.

When developing AIC, we sought to have it domiciled in the District of Columbia to benefit from its Captive Insurance Company Act of 2000, which permits the charter and operation of captive insurance companies. That favorable legislation, along with the large association population in Washington, D.C., and the hardening insurance market, made forming a captive attractive. In August 2003, the District of Columbia welcomed AIC as its 12th captive.

Why form a captive?

The current marketplace is particularly difficult for association-sponsored programs. Numerous insurers have exited the association-program market, forcing those that remain to raise prices and reduce the scope of coverage. In the hardening insurance market, in which premiums increase as insurers compensate for negative loss ratios and weak investment incomes, captives provide an alternative to rising prices and diminished coverage provisions.

Sponsored insurance programs have become increasingly popular as a member benefit and nondues revenue source for associations. Captives, meanwhile, allow associations to tailor insurance protection under market circumstances when members need it most. Moreover, increased risk control and more cost-effective administration help lower premium costs. And from the association's perspective, offering captive services can attract new members and augment nondues income.

ASAE's sponsored captive allows associations with existing sponsored insurance programs to access captive operations through a turnkey facility that costs associations less than it would if they were to form a traditional captive and does not require significant start-up capital. This way, associations that otherwise would not have the resources to effectively develop new captive operations on their own can do so, thereby benefiting from the potential investment and underwriting income generated by this type of offering.

How to get started

Associations best suited to take advantage of AIC's services are those that already operate a successful sponsored insurance program. ASAE Services, Inc., can help associations evaluate their potential to form their own cell captive within AIC. Forming such a cell not only is a potential revenue opportunity, but it also protects associations from exposures and losses.

AIC offers management, legal, accounting, and actuarial resources to qualifying associations--all at discounted rates for ASAE members. For a nominal franchise fee, AIC provides capitalization, the use of its facilities, and ongoing business and consulting services.

For more information on captive insurance companies and current market conditions, see Jeffrey P. Altman's article, "Implications and Opportunities in the Hard Insurance Market," in the October issue of ASSOCIATION MANAGEMENT. This additional background may help you decide whether AIC's services might serve as valuable risk-management tools for your association and your members.