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An inside look at a mature captive.

An Inside Look At a Mature Captive

In 1974, six medium size industrial companies joined together to form what is commonly referred to as a captive insurance company. The six sought refuge from volatile commercial insurance rates and often inconsistent, property loss prevention engineering efforts of their property insurers.

The captive they formed, Wrenford Insurance Company Limited, is a speciality property insurer marking its 15th year of continuous service to and profitability for its policyholders and shareholders. An insurer solely of shareholder industrial properties that meet stringent highly protected risk (HPR) underwriting criteria, Wrenford has been able to provide a cost effective, stable alternative to commercial insurance and self-insurance.

Wrenford was organized and incorporated under Bermuda's Companies Act of 1970. A Bermuda domicile was chosen at the time to provide ready access to reinsurers while avoiding the often onerous regulatory burdens associated with domestic insurers. Through a pooling of risks, Wrenford was able to attract quality reinsurance that would not otherwise have been available to any of its members individually. More importantly, the initial member companies recognized the significant role a commitment to loss prevention would play in assuring the long-term success to their fledging company.

Wrenford offers the self-insurer a viable insurance and loss control alternative. The extended loss prevention resources available through Wrenford to its members are not otherwise available to self-insurers, at least not at a comparable price. Also, self-insurers normally seek protection against catastrophic losses, and Wrenford fulfills that need at a low cost and has reduced the financial definition of a catastrophic loss to very reasonable terms.

Internal Structure

Wrenford's structure provides for an open, participative organization with each shareholding member company required to appoint a director, and up to two alternate directors. As noted earlier, the risk managers of each shareholder form the all important underwriting committee. Not only is that committee responsible for establishing and enforcing underwriting standards, it manages the services which Mead Loss Control provides to Wrenford, and is responsible for securing the company's reinsurance.

Along with the underwriting committee, three other standing board committees exist. The finance committee oversees the administrative aspects of Wrenford, and directs company investments. The company's general manager reports to and receives directions from the finance committee. The audit committee, in conjunction with Wrenford's outside auditors, Peat, Marwick, Mitchell & Co., assures compliance with all external regulations and maintenance of effective internal controls. The members of those two committees are normally directors or alternate directors who are financially oriented. The fourth committee, is the executive committee, which consists of the chairpersons of underwriting, finance and audit, plus the president of Wrenford, who is elected by the board from among the directors. The role of the executive committee is to give direction to the company, its president and its administrative staff between meetings of the full board.

While much of Wrenford's direction is established by its committees, all committee actions are subject to review and approval of the full board of directors. Special sub-committees are periodically appointed to study and recommend actions to the standing committees or to the full board. Recent sub-committees included a committee appointed to replace the retiring general manager, another to review engineering fees and services, and to a third develop an updated company mission statement.

All meetings of the board and its committees are held in Bermuda and are attended by Wrenford's local management staff, public accountant, legal counsel, investment advisor, engineering service and representatives of the company's reinsurers. The meetings are comprehensive and follow agendas prepared by the chairpersons of the standing committees and the president.

As a stock company with nine member companies, the directors must recognize the long-term benefits of the group structure of Wrenford and not necessarily those of their respective companies. At times, individual directors must be willing to compromise individual company held positions for the good of Wrenford. Since each member company has an equal vote and the bylaws dictate majority rule, Wrenford's proceedings are truly directed by all its members.

Through active director involvement, Wrenford remains committed to the basic goal of providing a low cost, stable coverage alternative to commercial insurance or self-insurance. Each director or alternate is expected to take an active role in the management process. Currently, seven of nine member companies have directors or alternates in leadership roles within the company.

Wrenford's Services

Through the pooling of resources, Wrenford was able to support a dedicated specialized loss prevention engineering effort, tailored to Wrenford's specific needs. Strict underwriting criteria were developed and enforced, not only by and among the member companies, but also by Wrenford's loss prevention engineers, Mead Loss Control Consultants.

Wrenford has a 15th year aggregate loss ratio (losses to premiums) of 10.84 percent, and its total insured values now exceed $12 billion for more than 300 properties located in the United States, Canada and Europe. Wrenford has proven its ability over the long-term to provide a sound, stable property insurance alternative while offering an attractive financial investment opportunity to its members.

Wrenford's risk retention is limited to the first $150,000 per loss occurrence and 1 percent of any loss thereafter, up to $25 million in excess of a common policyholder deductible of $25,000. The deductible is separately applied to property damage and business interruption losses. All member companies assume an equal portion of any loss within Wrenford's retention, reflective of each member's equal shareholding. Above the Wrenford retention, reinsurance is secured directly through the Hopewell property reinsurance treaty facility, which includes such recognized reinsurers as Swiss Re, Zurich Re, and Prudential Re. Through this approach, Wrenford meets both the risk transfer and risk sharing tests often applied by the Internal Revenue Service. Therefore, premiums paid to Wrenford are deductible for U.S. and Canadian tax purposes. However, since Wrenford is a non-admitted insurer, U.S. premiums are subject to a 4 percent Federal Excise Tax.

Wrenford maintains a relatively low retention level while still enjoying the direct access to reinsurers. Low retention protects shareholders from serious financial consequences in the event of a catastrophic loss or series of losses (Wrenford also purchases stop loss protection from its reinsurers). From the policy-holder perspective, gross premium rates are low, especially if one considers the $25,000 deductible levels and incentives are provided through annual policyholder dividends, which reward policyholders for positive loss experience. Net rates, after dividend, are virtually unmatched by commercial insurers, though on occasion Wrenford policy-holders have been approached by commercial insurers willing to "buy" their property insurance business with artificially reduced rates.

There are some significant differences between the loss ratios of Wrenford and other commercial insurers. The members' ability to control expenses results in significantly lower overhead expenses than normally encountered by commercial insurers (e.g., Wrenford does not have a marketing staff, does not pay brokerage commissions and does not have the significant statutory reporting requirements of domestic insurers). However, Wrenford does spend considerably more than commercial insurers on engineering expenses. Roughly 20 percent of gross premiums, an expenditure which the shareholders and directors of Wrenford strongly endorse. Wrenford consistently adheres to very high HPR standards, which are effectively and objectively enforced by Mead Loss Control's engineers. While some who have examined the audited statements of Wrenford have questioned the level of engineering expenditures, Wrenford directors quickly point out that the commitment to loss prevention has been the key to Wrenford's long-term success.

Mead Loss Control's staff includes nine degreed engineers who are in turn supported by eight administrative and extended service personnel. Each Wrenford policyholder is assigned an account engineer who coordinates the engineering services to assure a consistent approach. The designated engineer works directly with the policyholder's risk manager in the communication of inspection findings and recommendations. Compliance schedules are developed with plant management and continuously monitored by the account engineer. All new construction is reviewed and designed with Wrenford standards in mind. Annual reviews are held with the headquarter's management of each policyholder and improvements and deterioration of loss prevention efforts at each facility are noted, with particular emphasis being focused on employee performance and safety procedures.

In recent years, member companies in conjunction with Mead Loss Control have developed a property profile system which allows Wrenford insured property risk data to be consolidated to evaluate and compare groups of risks. The profile system is intended to supplement and enhance engineering/underwriting activities, and forms the rate structure under which similar properties and risks have similar premium rates. The concept of rate equity in a group setting such as Wrenford is essential when member companies share equally in all losses.

The property profile system is based on the assignment of points to nine critical risk categories, consisting of construction, occupancy, water supply, sprinklers, supervision, self-inspections, plant emergency organization and other exposures. Premium rates reflect the overall profile rating, which assists the insured in assessing what a specific protection improvement would mean in terms of a rate adjustment. The profile system also helps Wrenford's underwriting committee to quickly identify problem areas relative to any insured property. The profile of each insured facility is reviewed each time a Mead Loss Control engineer visits a Wrenford insured location.

Mead Loss Control reports directly to the underwriting committee of Wrenford's board of directors. The underwriting committee consists of the risk managers of each of the shareholders. The committee conducts "peer reviews" of all properties to assure compliance with the strict underwriting criteria of the company. As a result, deficiencies are usually corrected immediately or properties are voluntarily removed from Wrenford before mandatory corrective action is required.

Limited Coverages

If Wrenford is so successful why hasn't it grown more? Wrenford fills a special niche which does not, by design, fit the profile of many industrial companies. Wrenford writes only HPR fire and extended coverage for its member companies, and only with a common deductible of $25,000 (this was done in furtherance of rate equity). This means coverages such as boiler-machinery, non-HPR fire and DIC must be placed elsewhere. Wrenford has ways to handle those types of risk, but only insures qualified HPR risks. Additionally, Wrenford's underwriting standards are quite high and require a demonstrated commitment to loss prevention and historic good loss experience. An equity investment of a company shareholding and commitment of management time are additional membership considerations.

For those who participate in Wrenford, the record of a sound, profitable insurance alternative is clear. That is why the member companies are observing 15 years of success that is measured in consistently low property insurance costs, and a portfolio of well protected properties that have enjoyed a remarkably loss-free history.

Ronald H. Stolle is director of risk management for Reliance Electric Co., based in Cleveland, OH.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Wrenford Insurance Company Ltd.
Author:Stolle, Ronald H.
Publication:Risk Management
Date:Jul 1, 1989
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