No longer niche: Programs and Captives gain ground

Recording date: 09/13/24
Air date: 10/30/24

In the final episode of the “Market in Transition” miniseries on the Future of Risk podcast, Eric Cittadino, Head of Programs at Zurich North America, and Dawn Hiestand, Head of Group Captives at Zurich North America, explore specialized insurance segments: Programs and Captives. With Programs, Cittadino explains that Zurich grants underwriting authority to Program Administrators to cater to underserved markets, focusing on mid-tier and small to medium-size businesses. Dawn Hiestand discusses Captives, through which companies form their own insurance company to manage their own risk and carriers provide fronting services. She outlines various captive structures such as single-parent captives and member-owned group captives. Both guests delve into the shifts in customer profiles and capacity challenges that are making Programs and Captives less alternative and more mainstream in today’s risk management landscape.

Guests:

Eric Cittadino
Head of Programs
Zurich North America

Eric Cittadino is Zurich North America’s Head of Programs, a segment that is part of the Middle Market business unit. Cittadino joined Zurich in 2000 and has held several leadership roles across the organization, including as Construction Regional Vice President for the Midwest and Chief of Staff for the former Alternative Markets business unit. Cittadino also served on the Programs leadership team as a Strategic Business Unit Leader before being elevated to Head of Programs. Cittadino also served on the Programs leadership team as a Strategic Business Unit Leader before being elevated to Head of Programs. Cittadino holds a bachelor’s degree in both finance and marketing from Western Illinois University. 

Dawn Hiestand
Head of Group Captives
Zurich North America

Dawn Hiestand is Zurich North America’s Head of Group Captives, which serves member-owned, agency and fronted captives and is part of the U.S. National Accounts business unit. Since joining Zurich in 2000, Hiestand has held leadership positions in Claims, Operational Transformation and Underwriting. She served as Chief Operations Officer for Alternative Markets before serving in the same role for Zurich’s Direct Markets business. She previously practiced law at private firms. She earned her Juris Doctor and Bachelor of Arts in Political Science from Valparaiso University and was admitted to the Illinois Bar in 1997.

Host:

Al Orendorff
Chief Communications Officer
Zurich North America

Al Orendorff is Chief Communications Officer at Zurich North America, where he is a member of Chief Executive Officer Kristof Terryn’s senior leadership team. He previously held communications leadership positions at Allstate Insurance, Aon Corp., Genworth Financial and Choose Chicago. Orendorff began his career as a journalist working in television and radio news, including stints at NBC-TV in Peoria, Illinois, Black Entertainment Television, and WBEZ and WGN radio in Chicago. He is based in Chicago.

(PLEASE NOTE: This is an edited podcast transcript, capturing speakers with natural speech patterns that may include incomplete sentences and/or asides, grammatical errors, verbal shorthand and some statements that may be less clear in print.)

Episode transcript:

AL ORENDORFF: There’s an expanding array of risks that don’t fit into the traditional insurance market. Businesses have exposures where cost-effective solutions are hard to find in the traditional insurance market. This is driving demand for specialized Programs, Captive Solutions.

Welcome to Future of Risk presented by Zurich North America. We explore the changing risk and resilience landscape and share insights on the challenges that face businesses to help you meet tomorrow prepared.

This is the final episode in our miniseries on “Market in Transition.” So far, we looked at property and auto. But today, instead of looking at specific lines, we want to showcase two alternate insurance options that could benefit your business: Programs and Captives.

I’m Al Orendorff, and today I’m speaking with Eric Cittadino, Head of Programs at Zurich North America, and Dawn Hiestand, Head of Group Captives at Zurich North America. Eric and Dawn, welcome.

DAWN HIESTAND: Thank you.

ERIC CITTADINO: Hi.

Exploring Programs Insurance

ORENDORFF: Thank you. You’re very welcome. Let’s jump right in. Every business knows they need insurance coverage to do what they do best. How is Programs different than the traditional insurance coverages? Is this about the size of the business?

CITTADINO: I appreciate the question, Al. And you know, maybe if it’s OK, I’d like to take a step back and just even talk about what Programs is because I think there’s just a lot of opportunities for people to understand that a little bit better.

When we think about the Programs space here, we think about Zurich really granting underwriting authority and extending a letter of authority to a third party or to a Program Administrator in this space, so that they can, in turn, write a book of business for groups of customers with what I’ll call, similar customer industry characteristics or risks on our behalf. So that’s what they’re generally doing.

And these industry segments tend to be underserved by the larger insurance marketplace. So, our Programs unit will kind of partner with these Program Administrative Partners. Then in terms for them doing this business on our behalf, we will compensate them to write this business and to make sure they’re doing it in a profitable fashion.

So, that’s just a little bit of the background. But, getting back to your question around the differences, most of our transactional underwriting colleagues within Zurich North America engage with agent and broker partners directly to generate their business.

But in the Programs arena, we like to think of our customer, quote-unquote, as the ‘Program Administrator,’ him or herself. They ultimately have the responsibility to engage with the distribution network within the respective business segments on our behalf again. So, that’s kind of the differences there, number one.

And then in terms of your question around the size of business, the average premium per insured could vary in our space, but it tends to be on the scale that’s more in that mid-tier, middle market customer and lower. Even in some cases, it kind of focuses in on the small and medium-sized enterprise segments or that SMI (small and medium industry) business space.

So, the Programs business in general is a very healthy one. It’s a growing segment of the business in the insurance marketplace. And to give you a little bit more context there, the programs space represents more than $80 billion nationally as we look at it through data that came to us on year end of 2023.

The industry analysts have noted that the programs marketplace itself is currently outpacing the traditional insurance market. So, this business segment really brings that diversification not only to our Middle Market business unit, but also to the larger ZNA portfolio overall.

Captives vs. traditional insurance market

ORENDORFF: Great. I appreciate that. Additional background and insight, that was helpful. OK, Dawn, your turn. Can you tell us about captives and how they differ from the traditional insurance market?

HIESTAND: Yes, absolutely. I would say similarly to what Eric was saying. So, when we think about captives, it really is a structure that is generally driven by companies that want to participate in their own risk. And not only do they want to participate in their own risk, but they want to be held accountable for their own individual performance.

Depending on size, appetite of risks or the types of coverages that these customers are looking for will dictate the type of captive that is available to them as a solution. So, I’m just going to very high-level describe a few different sorts of captive structures that are available. One is really just a single-parent captive. I think many of us know and have heard the single-parent captive structure, which is really called a “pure captive.” It’s 100 percent owned and controlled by one parent who insures the risks of not only the parent company, but all of its affiliates.

And virtually any line of coverage can be handled through this type of captive structure. And the insured benefits from the captive underwriting profits. And that’ll become important as we talk about this alternative risk structure of captives in terms of the ability in which to see financial gains, if you will, for outperforming actuarial projections.

The second type of captive that is familiar to the industry is one called “protective cell captive,” or a “segregated captive.” It’s sometimes called a “rental captive.” So, there is no risk sharing that basically happens between the participants in this particular structure. They don’t use each other’s assets to pay for liabilities, but there really is an agreement that they have among each other that they are going to participate in this particular captive structure, yet not look at each other to help in the covering of liabilities or losses. This also provides an opportunity for a variety of different coverages to come into play that maybe aren’t getting placed in the traditional market.

And then finally, the one that we’ll probably talk a little bit more about today is really around member-owned group captives. This is an actual insurance company that’s formed and controlled by multiple companies, where they are coming together to insure certain risks, typically high frequency and low severity.

So, distinctive from the two structures we just talked about a minute ago. The lines of coverage that you typically will find is Workers’ Comp, Auto Liability, General Liability and Property Damage coverage. And each of these members wholly own this insurance company. They are really ones that are facilitated, if you will, by individual member or company structures focused on safety, want to be held accountable for losses, they want to control their losses, but they’re also truly entrepreneurial. They are looking for a way in which to cover risks that they would otherwise be placing in the traditional market.

Challenges and growth

ORENDORFF: That is great, Dawn. Thank you. A two-part question here. You both mentioned that your segments are growing. I’m very interested in what’s causing this growth. And I also, I guess this is kind of a combination comment and question. I would imagine that education is probably a key component of your work agenda in that you probably have to counsel customers occasionally that here are the circumstances that are coming together and you might wish to look at “X” or “Y” and here is why you want to look at “X” or “Y”. Is that a fair statement?

HIESTAND: <crosstalk> Absolutely there. I think in this particular area, even though there are and have been traditionally so many benefits, education, Al, I think is absolutely key because there is a distinctiveness around it where even when we think about go-to-market approaches, as Eric had even mentioned with his Program Administrators, similarly within captives, we rely heavily on the relationships that we have with captive consultants in the industry.

So instead of us having that direct conversation and education opportunity with brokers, we are really relying upon those captive consultants to be the experts in the area to explain the benefits of a captive structure.

But I mean, in terms of growth, a couple reasons on the captive side is it’s really around capacity and pricing. So, we know that there are a lot of capacity challenges out there right now in terms of what it is that a carrier is ultimately able to provide and deploy.

And so, what draws the companies in is really wanting some of the stability associated with what a captive model can bring. So, they’re not only just being drawn to the captive model so that they can gain the capacity that they need with other member companies or see stability and pricing. But, what we find is they stay. The retention numbers for captives is very high, especially in the group member-owned captives. We run about, I would say industrywide, you’re probably looking at about a 95% retention rate once someone enters that captive model.

ORENDORFF: Wow.

HIESTAND: Yes.

ORENDORFF: I didn’t know that.

HIESTAND: I mean it’s amazing. Yes, it really is. And I think once that education takes place and the value proposition comes hand-in-hand with the benefits that they’re looking for, there really isn’t a driving reason for a member company to leave.

And so, growth is there… the Group Captive area itself is probably around a $6 billion-plus business and growing, and we find it growing about 5% to 7% year-over-year. So, the growth trajectory is just something that’s really exciting right now, but I don’t see any end in that growth trajectory happening as that education happens more and more.

ORENDORFF: Excellent. Eric, what about growth?

CITTADINO: If it’s OK, I’d like to talk a little bit and kind of build upon what Dawn just talked about from an education perspective, because there are a lot of parallels in both of our businesses where Dawn’s unit works with those captive consultants. As she mentioned, we have those Program Administrator partners that we’ve talked about. And really the whole essence of programs is the reason why we’re partnering with a third-party partner to do our business and transact the business on our behalf is because they have an area of expertise that maybe far exceeds Zurich’s.

And that’s the reason we would go out there. If we had more of that expertise in-house, we would probably just keep that in-house and actually do it through our traditional transactional underwriting unit. So, a lot of education really flows both ways. Like we have the power of Zurich and a lot of the critical mass and a lot of data that we can rely on to kind of extend and try to give some insights to our PA (Programs Administrator) partners. Conversely, they’re giving us a lot of their insights around hazards, other loss trends that they’re seeing related to their given industry segment. So, it’s a really nice blend of being able to kind of leverage some of the expertise that we both have in this arena, in the Programs space, number one.

But to get back to your question around, are segments growing? You know, when I look at our programs marketplace overall, we have nearly 1,100 PAs that are represented in the United States. As we sit here today, Zurich Programs currently has relationships with only 17 of those potential partners out there.

So, although we want to continue to provide exclusivity to those PA partners who maybe have depth and breadth of relationships across multiple industry segments, we still want to see a lot of headroom to be able to partner with other prospective PAs within their organization.

There’s a lot of that growth opportunity in our arena of programs. In addition to that, as I previously mentioned, there are several industry segments that are underdeveloped or underserved from the traditional marketplace perspective. Which then they make their way into our programs arena and that gives us more substantive growth opportunities as we look to the future. Finally... <crosstalk>

HIESTAND: Yes, and I was, but I would say… <crosstalk>

CITTADINO: I’m sorry, go ahead.

HIESTAND: Oh, no … I was just going to say, Eric ... I was just going to mention just in that regard as well as the opportunity where you and I think about the customers and the partners that we deal with. There’s that real opportunity, Al, that is not only just individual growth, but growth across segments because you already are dealing with customers who are looking for that alternative way and approach in which to cover their needs around risk.

And so, we’re finding that that opportunity, that while, like for instance, the types of risk doesn’t fall in line with the traditional lines within a group captive, there are other capacity challenges and types of risks that need to be solved for. That’s a great opportunity to go then to the program side to say, “Look, you may actually have someone who has expertise, who knows how to underwrite this business.”

Zurich has a level of expertise to bring to that relationship as well. And so, we find ourselves bringing customers together to solve for an entire solution versus just what one individual can solve on our own.

CITTADINO: I really appreciate you saying that, Dawn, because that is another part and that kind of goes to the essence of that lower end, middle market arena. That space that I had talked about earlier. We really serve as a little bit of that white space.

We’re able to provide a solution, a healthy solution around that white space that exists in certain industry segments and partnering with your organization where you’re on the larger end of the spectrum of insureds and customers. We help blend that and round out to the overall solution, to your point.

Captives insurance: Key drivers and business motivations

ORENDORFF: So, what I’m hearing is that the two of you are like the dictionary definition of relationship management, given the spaces that you’re interested in. So, this is great. So, thank you for that.

Dawn, is it more of a push or pull for the companies that you serve? I mean, do they choose a captive or is it because they can’t find options they want in the traditional market?

HIESTAND: I would say it’s probably a little bit of both, Al, as I think about that. I think in terms of kind of pushing the business model, it goes back to the theme that we’ve kind of talked about here just in terms of education. There’s just kind of an essential, I’ll call it lack of understanding of potentially what is the right customer profile and what does it look like.

So, the education is still even occurring among our broker community in terms of what is a group captive, what would be an ideal client to bring forward? But once that model is understood, that’s then where we really start to see the push for the companies wanting to enter the model.

So, it’s that understanding in addition. So, we know in Casualty right now, the pricing environment is difficult and so we’re finding that now brokers are looking to educate themselves. A little bit more on that, but I do think that once they understand the value proposition, a customer reaches a certain maturity level relative to their risk mitigation practices, their focus on containments of loss, they’re looking to be held accountable and rewarded, by the way, for, as I had mentioned earlier, outperforming actuarial projections.

So, they have that opportunity to earn dividends and investment income on premium in which they’ve otherwise put into the captive structure. If they don’t use it at some point in time, they see that come back as a benefit to them. So, again, it’s not that the captive model is necessarily immune to kind of pricing increases or what’s going on in the environment, but they’re certainly insulated.

And so, we found over time that now companies are coming more to the model through education, being dedicated to risk management, loss containment, and really understanding, wait a second, I can actually reap a bit of benefit, right? For being best in class in a captive structure.

Key benefit of programs: specialized expertise

ORENDORFF: Eric, how does that differ from why a company would be in the market for Program Insurance?

CITTADINO: Policyholders in our space are still looking for that specialization in terms of underwriting expertise. In terms of the kind of stability in a carrier bringing good financial resources, a strong brand, which, I’m proud to say that our Programs business segment has been in existence for over 60 years.

So, there’s definitely that specialization, the depth of and the stability that a carrier can bring to it. But there’s also a need in our space for the Program Administrator Partners themselves. They don’t have some of the infrastructure elements in their business and that’s why they extend themselves out to a carrier partner. So, for example, they’re looking for claims expertise or risk engineering expertise in some cases. Sometimes, they need help if it’s an admitted program or they need to get filing assistance and support. Maybe they need some help from our Corporate Law Group and so on.

So, they’re utilizing some of our top-tier service offerings that we have in the business to be able to run their business more effectively and really keep their efforts and their focus on the underwriting segment of the business. Focusing on their relationships with their agent broker partners and ultimately the insureds that they represent. So, that’s kind of the big differential I see on our end.

ORENDORFF: In the last few years, have either one of you seen a change in the types of companies coming your way?

CITTADINO: Dawn, do you want us kick us off there?

HIESTAND: Yes, absolutely. I’m happy to. So, I would say, Al, yes, we have and it’s, again, I think there’s a lot of those external pressures that are coming into play. So, when we think about the group captive model in particular, we really do continue to see mid-market to, I would say, large mid-market size companies that gravitate towards that group captive model. But, in seeing an increase as customers learn more about the model, and again, continue to have a challenging rate environment, we’re starting to see more complex risks in what I would call “larger accounts,” looking to enter into that group captive model.

So, they’re kind of finding, if you will, that sweet spot between, am I large enough and have enough distinctive types of risks that I need to ensure and participate in where I fall in that single parent structure?

Or am I still in the spot where I find that the benefit is still associated with being a wholly owned insurance company? I have the benefit of best practices that I can share among colleagues. I have the opportunity, again, to see dividends come back if I outperform what premium has been selected for my risk.

It does come with some challenges, right? As we think about that going into the future, and I think, as an industry, we need to consider this, which is, as that shift happens in those larger, more complex risks, the beauty of the group captive model is really around and has been built around high frequency, low severity [risks]. The external market itself isn’t necessarily operating that way. And I’m sure Eric will agree with me, I hope, on this particular topic. But again, in that Casualty environment, it is quite challenging.

And so, we are starting to see frequency in severity, which does impact how that Group Captive structure can continue to perform as you bring in larger accounts, as you bring in more complex risks. And couple that with the external environment relative to social inflation litigation, particular states performing more poorly than others, at least what we can see from results out in the marketplace, it makes it a bit challenging.

But having said that, it’s still so exciting to see customers gravitating towards a model that has historically worked and they want to be a part of. So, customer composition is changing and we certainly want to still be able to accommodate different customer structures in what we believe to be a truly great risk transfer option.

CITTADINO: Dawn, I couldn’t agree more in terms of the Casualty arena and some of the challenges that we’re seeing in some of the opportunities in that space, for sure. That’s what we’ve been seeing over the last few years here in Programs. But in addition to that, we’ve seen a fair amount of what I’ll call an influx of property-oriented business that is making its way into our space.

So, think about, like, the real estate segment or hospitality type of risk, even some cat[astrophe]- oriented property exposures where there is an expressed need for capacity. And I know, Dawn, you touched on this earlier, where there’s just not a lot of capacity, a lot of interests of a lot of insurance companies to write some of these segments holistically.

So, there’s been a lot of that opportunity coming into our space looking for that comprehensive insurance solution to those exposures, as well as, again, like I mentioned, that stable capacity, stable outlook and strategy that is coming from their carrier partner.

In addition to that, though, we are seeing an emergence of what our team calls our specialty product-oriented business coming into view. These types of PA partners are looking to bring portfolios of risk together via program structure and think about these in terms of like professional liability; errors and omissions.

Those are the types of opportunities that exist in that specialty products arena for us. We definitely want to see more of those opportunities come in. We feel like that’s an area that would help diversify us and broaden ourselves out in the program space. So that’s going to be something we’ll look to the future here in the next couple years to see where we go with that type of business segment.

What does the future hold for programs and captives?

ORENDORFF: OK, as we wrap, I’m going to tap into your psychic powers now. What do you both see ahead for your segments?

CITTADINO: Yes, so Dawn, if I can go first here. Yes, kind of moving forward from our end, when I kind of bring up the old Magic 8 Ball here, we seek to bring more diversification to our portfolio. We tend to lean heavily towards the Property LOB [line of business] within Programs. Now we’re trying to diversify away from that and trying to bring that specialty product and oriented business as well as that casualty business into the franchise.

We expect in our space for mergers and acquisitions to continue, or it has been continuing that way. And we anticipate that to kind of continue its way forward, whether it’s a function of gaining more scale in a given industry segment, or if it’s a result of these perpetuation challenges of leadership within the given Program Administrator where maybe that next generation leader doesn’t necessarily want to move forward in the insurance marketplace. So, that would be a mechanism for the PA to kind of sell themselves off to another organization and try to consolidate their operations.

In addition, on the property piece where like I mentioned, we’re pretty significant, we expect the rate arena to moderate slightly, but that’s really contingent on what happens, in terms of cat[astrophe] perils that happen across the country in a given year. If we have a more muted year, we say in 2024 here, maybe it won’t be as hard in terms of the rate cycle as what we are used to going into 2025.

Conversely, if we see more activity, we fully expect that the market hardening that’s been happening in this LOB to really continue. And then finally, I would say on the Casualty lines, and Dawn touched on this a little bit earlier, in terms of GL [General Liability], Auto specifically, I expect those rate increases to continue to outpace the loss costs that we have for these LOBs. We see a ton of inflationary increases impacting these segments of our portfolio. Social inflation and nuclear verdicts are still taking place across most of the segments that we have not only in the insurance marketplace but also in the program space. So that’s something we just have to keep a watch eye on.

HIESTAND: Yes. And Eric, I agree. I think all those points are equally as applicable in the captives realm. I would say, if I were to continue to look ahead specifically for captives, continued education and demand for it, I think, will certainly continue to increase in this space as these, again, as we collectively talk about these external components that are impacting customers, in placement of their insurance.

I also think that we’re just going to continue to see customers who are looking to participate in their risk and they are going to look for opportunities in which to be a player. We see that continuing in our conversations that we have directly with our captive consultants, our broker partners, and our customers. So, I think that we will continue to see customers wanting to take on more and we just need, I think, as an industry to be prepared.

And actually, I think it’s an exciting place to be as it relates to the growth conversation, as well as how do we meet these customers where they are with the amount of risk tolerance that they have in a challenging environment, but one in which I do think from a carrier perspective and an industry perspective we can get there.

So, I think that that’s going to be something that we’re going to continue to be looking at. And then I would say if I were to think out a little bit more, Al and Eric, I don’t know if you think the same about this, but I actually think that at some point in time when we’re talking about market in transition and we talk about these alternative market solutions, I truly believe at some point in time we may be talking about these as mainstay solutions.

I don’t know that they’ll continue to be alternative. I think at one point in time when they started it was, let’s get our arms around this and understand what we’re solving for. But going forward, I truly believe that this will just be an insurance option, whether it be Eric’s Group Captives, we are here to stay. And it may be a more of a mainstay industry conversation.

CITTADINO: Yes, well said, Dawn. I couldn’t agree more. I think that’s a really good observation and believe that is we are going to have these options be the more mainstay or mainstream type of solutions in the marketplace moving forward. So yes, well said.

HIESTAND: Yes.

ORENDORFF: And I think that what that means for us is that we keep a close eye on how the business is evolving. This has been a terrific discussion about an area of the business that some people don’t know a whole lot about. So, I really want to thank you both for joining us today, Eric and Dawn, much appreciated.

HIESTAND: Thank you. <Crosstalk>

Cittadino: <Crosstalk> Very much.

ORENDORFF: And thank you also to our listeners. We hope you’ve enjoyed our deep-dive miniseries into Market in Transition and discovered some take-aways to help protect your business as you navigate the transitioning landscape. If you like the show, leave a comment or review wherever you get your favorite podcast. Or drop us a note at media@zurichna.com. This has been Future of Risk presented by Zurich North America.