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Attaining the gold standard of service.

CAPTIVE INSURERS ARE A FORMIDABLE player in today's alternative insurance arena, but they must not take their present position for granted. Their long-term success undoubtedly hinges on the level of service that they deliver to clients despite the existence of either a soft or a hard insurance market. Captives must be able to deliver a highly specialized degree of service to their members; otherwise, during soft market cycles, captive members may be lured by the siren song of lower premiums being offered by traditional insurrs.

During the start-up phase, captives under-go feasibility studies and actuarial and proforma financial statement analyses. However, as captives mature, they may receive less attention, thereby opening the door for failure. Captive managers must guard against complacency.

Successful captives flourish by delivering an extra "service edge" to their members, and by constantly seeking ways to add new value. When forming a captive, few members want to think about losses, and optimism rides high. However, realism dictates that the captives with the most staying power are those offering high quality loss management and prevention services. The following considerations can help transform a typical captive into a state-of-the-art player and offer its clients opportunities for continued growth.

Improving client claims communications should be a major concern. Captive managers should publish a claims manual for members that covers such issues as where to report claims and lawsuits, how to select defense lawyers, procedures for issuing checks and settlement authority. Policy language gives little guidance on these matters, and a surprising number of people do not read policies.

Some forward-thinking captives offer a claims-reporting hot line comprising an answering machine, answering service, or 24-hour number giving access to a claims adjuster. More advanced captives, such as the American Psychiatric Association, provide claims-related advisory services such as legal hot lines. In this instance, member psychiatrists can phone about a patient situation and obtain legal advice.

Captives should have specialized legal counsel. For example, engineering and architectural companies should have captives with attorneys who know how to read blueprints. There is a temptation to use panels suggested by insurers, often composed of generalists who do many things adequately at a modest hourly rate, but who lack necessary specialized expertise. Astute captive managers will not only assemble a panel of specialized defense attorneys, but will also make sure they alone have the power to choose counsel and assemble such a panel before the first claims arrive. In addition, check references and evaluate defense attorneys on an ongoing basis.

Draft written service guidelines for approved counsel. Defense attorney must be given a set of standards to which they must adhere if they want future assignments. Written guidelines should include procedures on reporting frequency and format, billing, settlement authority and defense philosophy.

Even with the best attorney, winning or losing claims often comes down to a battle of experts. Captive managers should develop and cultivate an expert-witness data base made up of lists of experts well known in their fields and information on their specialties. Captive managers should obtain copies of their curricula vitae and publications as well. However, managers should avoid "professional witnesses" because they have less credibility and a longer paper trail on which to be impeached at trial.

A source book should be developed on hostile witnesses as well. If the same expert witnesses are frequently confronted at trial, compile a dossier on them. This helps bring the defense attorney up to date, saves money and improves the chance of impeaching the other witness with his or her prior inconsistent testimony.

Invest time in developing an effective claims service, and pick adjusting services carefully. Most independent adjusters do not specialize. Captives, however, need specialized claims-adjusting expertise. Captive managers should question applicants carefully about their expertise in the captive's likely source of claims.

Alternatively, depending on claim volume, captives may wish to transfer claims-handling and adjusting functions inhouse. Too few claims may idle the in-house claims staff, whereas too many claims, and the carrying costs of employing in-house adjusters, may get out of hand. However, an inside staff may be overwhelmed by the volume of claims. Captives often find that adjusting services represent a "make-or-buy" decision. For more control over the claims-handling process, inventive captives will bring the claims function in-house.

Establishing the captive's own off-the-shelf or tailor-made computerized claims management information system is a good way to streamline operations. Off-the-shelf products are more affordable but less adaptable to captive needs; whereas tailor-made packages have the advantage of customization but are more costly. There is so much risk management software on the market today that the captive manager may want to hire a consultant who can sort out options and make recommendations.

With an information system in place, captives can develop their own loss, rating and reserve data, which helps establish credibility with actuaries, auditors and reinsurers. Further, a computerized claims data base can enable captive managers to produce a loss run tailored to the needs of their members.

Captive managers should provide substantive loss prevention services that help captive members find ways to prevent claims. For example, free loss prevention surveys can be conducted by outside consultants or engineers. Captives can also cultivate expertise in-house to conduct on-site surveys that will pinpoint areas of strength and improvement. Captives should be mindful to avoid the pejorative connotations of the word "audit." Survey results can augment underwriting decisions, and onsite surveys can improve the quality of underwriting decisions, provide a servicing edge for the captive, be used as an effective marketing tool and reduce loss frequency and severity if safety recommendations are implemented.

One must guard against the "China Doll Syndrome," however, where a loss prevention program sits on a shelf, looks nice, but never really does anything. Not all loss prevention suggestions will be popular and captive members may think that such techniques are something that the other guy needs. Suffice it to say, an effective loss prevention program may have to be confrontational at times if it is to be more than just a symbolic gesture.

Loss prevention surveys can also be used to gauge prospective captive applicants so that a full view of hazards and potential risks is known before a company joins the group. They can even be offered on a fee-for-service basis to non-members, unbundling the service and providing the captive with a revenue source independent of premium fluctuations.

In addition, captive managers should offer prospective loss prevention educational services. On-site surveys are useful, but they are labor intensive and deal only with one company at a time. Captives need to add other dimensions to their loss prevention programs that offer more "bang for the buck."

For example, a written loss prevention manual, periodic seminars presenting loss prevention techniques and newsletters featuring practical articles on loss control techniques are useful to any captive loss prevention program. Also, instructional videos, audiocassettes and computer-based training with a loss prevention theme can be helpful.

Surveying captive members for satisfaction and following up on responses are increasingly common. However, they give managers only a glimpse inside the customer service arena. Captive managers must continually ask members about specific service complaints and what they can do to improve conditions. More importantly, captive management must listen intently and follow up to repair deficiencies. If a captive member voices a concern or complaint, a response should come within 30 days.

A captive's long-term viability may hinge on these services, which are rarely available from name-brand insurers who cater to many constitutencies. By elevating their risk services to a "gold-standard" level, captives can go a long way towards making themselves cycle-proof in both soft and hard markets.

Kevin M. Quinley is vice president of risk services for Hamilton Resources Corp. and MEDMARC Risk Retention Group in Fairfix, VA.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:captive insurance companies
Author:Quinley, Kevin M.
Publication:Risk Management
Date:Apr 1, 1992
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