george grombacher 0:02
While I’m left with is George G. And the time is right, welcome. Today’s guest struggle profit. Jared Beck, Jared, are you ready to do this? I’m ready. Excited to be here. Thank you. Yeah, let’s go. Jared is the co founder and Managing Director of Risk Management advisors. They’re an organization providing captive insurance, play benefits, work, workers compensation planning. Jared, excited to have you on tell us about your personal lives more about your work, why you do what you do?
Jarid Beck 0:30
Yeah, you bet. So right now, you know, sitting in Irvine, California, which is where our offices,
Unknown Speaker 0:38
we have a nationwide practice, but, you know, been in California my whole life. And, you know, really, the focus of getting out of college was always thought I wanted early on to be investment advisor or stock jock. got, you know, this is 2000 rights was the.com, AOL, you know, this is really infatuated by by all of that. But when I started my career actually started at Northwestern Mutual, more on the insurance side, which ended up being great, you know, good training, as I think, you know, but quickly wanted to, you know, more so than the personal financial planning was really more interested in the corporate business, the business side of things, you know, so left there, and joined up with a firm that was, you know, was doing that type of planning, and just really fell in love with that side of the business. And it was a couple of years in there, around 2002. Me and my partner that we know, a co founded risk management advisors with, we discovered, you know, this concept of captive insurance companies, and really started digging into that, and found it so fascinating and such a versatile tool. They’re like, alright, well, this is what we’re going to focus our careers on. And then so that was, it was Christmas Eve 2004. We founded risk management advisors. And, you know, flash forward, but here we are today. So it’s really that early interest in Finance, Financial Advising, you know, I did the CFP work very early on, before I started my career, and then it was, you know, just really, you know, getting deep with, you know, with a niche concept that, you know, this has served us well.
george grombacher 2:26
Nice. Well, having been, I think we started our career around the same time with very, very, very similar companies, which, which, which you mentioned, captive insurance, captive insurance company is something that’s always sort of been it, you know, floating around, but I don’t know that I really know exactly what it is. Can you tell us exactly what it is?
Unknown Speaker 2:46
Yeah, you bet. So, at its simplest level, a captive is an insurance company, that a business, or a group of businesses set up to insure their own risks. So, you know, give that explanation. And people say, oh, like self insurance. And it is like self insurance to a degree, but it’s a very formalized version of self insurance, where you go out, you actually go to a state or a domicile, you know, could be in the US could be internationally, you actually go to the Department of Insurance, form a new company, and get it licensed as an insurance company, and said, Okay, well, why would why would you do that? And there’s, there’s a handful of reasons or motivations for doing so. One of the main reasons is, you know, insurance companies, you know, they get favorable tax treatment under the Internal Revenue Code, if I just self insure, and I save money, well, now that money flows through to my bottom line, I have to pay taxes on that, which, you know, would be fine. If there wasn’t this potential that will, you know, just because my tax year, and it doesn’t mean that, you know, there isn’t going to be some loss that occurs, and I’m gonna end up owing. But, you know, if I’ve already, you know, I’ve got after tax dollars, I’m paying, you know, tomorrow’s claim with, you know, less money, it’s not the most financially efficient way to go about, you know, to go about carrying reserves, whereas insurance companies, they can put money into reserves for claims that we know about today, or, you know, claims that, you know, are incurred but not yet reported things we don’t know about, and then sort of gives you the ability to build up, you know, this, you know, a larger war chest to handle, you know, any losses that would come in. And the other advantage is that insurance companies can buy reinsurance, which is insurance company insurance for insurance companies. So it gives you additional markets to go to, to help you lower the overall cost of buying policies. So, those are kind of the two main reasons. Third, motivating factor, you know, a lot of companies are, you know, in emerging spaces, or maybe, you know, there’s some tough markets where the insurance is very limited, and you can’t get coverage for it. And so, you know, setting up a captive allows you to address and provide coverage for stuff you can’t get in the traditional market. So nice. Yeah, and we find a lot of business owners in, you know, especially growing business owners, you know, companies that are growing fast, you know, in high growth areas, or riskier segments of the marketplace, you know, either two or three of those factors are at play. And so the captive, again, is a really nice, versatile tool for addressing those needs.
george grombacher 5:48
And what are the needs that the insurance is meeting? Is it health insurance is property and casualty insurance isn’t life insurance? Yeah, it’s
Unknown Speaker 5:58
situational. But it can be D, all of the above. So, you know, certainly companies with a, you know, let’s say 100, or more employees, that are providing employee benefits or health insurance, you know, that’s probably their biggest expense after payroll. Yeah, right here to pay the employees, and then the next most expensive thing is going to be providing them health insurance coverage. And, unfortunately, for better, for worse, the system is rigged against employers in that, you know, the insurance companies are actually incentivized to pay out more claims, so that they can turn around and charge employers more, so that they can increase their their profit margin. And, you know, I mean, it’s a really unfair system for, you know, for companies to buy into, they need to have the coverage, they need to offer the benefits. But, you know, between what the hospitals want to make, and what the insurance companies pay out, it’s a system that’s rigged against them, that kind of goes back to health care reform, and, you know, the implementation of Obamacare, and some of those rules, you know, done nothing to lower costs, in fact, it’s, it’s gone the opposite. So what we’re able to do with the captive is, you know, exit from shelf products, and, you know, put them into a model where, you know, and they don’t do it all on their own, we consult with them, but, you know, there’s, there’s tools and techniques for taking control of, you know, how claims get paid, and lowering the overall cost of coverage, allowing you to reinvest in the plan provide richer benefits for your employees, instead of cutting benefits, you increase benefits, you know, while still, you know, again, putting more money back in your pocket. So, that’s on the health insurance side, again, that’s going to be companies 100. and above, you know, that want to offer a nice, nice set of benefits for their for their employees. Other spots that are really hurting right now, you know, cyber coverage, you know, is your lot about that. And, frankly, the traditional market insurance companies can’t keep up the, you know, the different methods of attack, you know, evolve more rapidly than, you know, than the underwriters can keep up with. So there’s just these perpetual gaps in coverage, and then they’re simultaneously being charged more and more for less and less, you know, less and less coverage. So, you know, we’re seeing a lot of companies utilize captives to fill those gaps. You know, certainly think about construction companies, builders, developers, contractors, you know, just heavy machinery, you know, swinging hammers, you know, a lot of risk associated with that. But, you know, companies with good safety that do the job better than their competitors, you know, they’re paying high premiums to subsidize everybody else’s poor losses, and they’re not reaping the benefits of that. So. And, in fact, early on back during, you know, you were here during this time, I think, you know, during the housing boom, right back, you know, 2000 2000 to 2003 2004, we worked almost exclusively with builders and developers, because it was a very difficult market for general liability. You know, you had companies charging, you know, it’s got 1,000,005 for 2 million of coverage. And, wow, the builders, they needed to have it so they could get their bank lines, so they could get on the, you know, on the project. But, you know, the insurance companies were holding them over holding them over a barrel. So, you know, the the sharpest guys that we worked with, alright, well, let’s set up our own insurance company, pay the million five to ourself, and then you know, they would just capitalize or cover the, you know, the Delta there, and, you know, kind of fully front that $2 million limit. And then once the policy expired, if they’d done a good job and the claims were low, now they get all that money back. So that was a very successful formula that still exists in certain pockets to this day, but But does that give you a flavor for you know, some of the Some of the implementations you can do.
george grombacher 10:02
It does. So why wouldn’t everybody do this?
Unknown Speaker 10:08
Yeah, good. Good question. One, there is a, you know, there is sort of a, you know, have to be at a certain threshold, for better for worse. You know, it’s not the cheapest strategy to implement, there are costs, you know, setting up the entity getting the license, you’re required, the regulator’s required to have an independent actuary, create and certify your rates and reserves. Each year, the captive undergoes a financial audit, by an excuse me by an independent auditor, you know, just to make sure they’re following the rules and regulations and that they’re solvent and can afford to pay the, you know, pay the losses for the risks they’ve taken on, you know, so that adds up to a little bit of frictional cost. And so you need to have a critical mass of premium, you know, to still make it worthwhile. See, any companies have a, you know, of a certain size, which is typically going to be again, you know, 100 employees and above on the employee benefit side, you know, companies in that 750,000 And above range on their on their liability coverages or property and casualty coverages, to just kind of you need that scale for it to, for it to make sense. For companies of that size, where it doesn’t make sense, we’ll get a lot of calls. You know, as a George, you call me up and, ah, man, I pay so much for my professional liability insurance, you know, I need a captive to help me lower my cost. They say, Okay, well, you know, what do you pay? And let’s say, let’s just say it was a million bucks, but then it’s okay, well send me your policy, and then send me all your loss runs. But then we get it in and say, Oh, the losses are actually a million to each year. You know, it’s you don’t need a captive, you need lost control, you know, you need to figure out why you know, why you’re having so many claims. And we’ll see that a lot on the workers comp side where they feel like their workers comp is expensive and unfair. But then you go to the work sites, and it’s, you know, it’s unsafe, people are getting hurt. And, you know, therefore, the claims are high. And so they haven’t taken those steps to get the losses under control. So it’s kind of like, you got to do the foundational work, you know, get your house in order, and then you can have the, you know, then you can have the cool toys.
george grombacher 12:26
Got it? Is it possible to get in on somebody on an existing captive? Or must I start my own?
Unknown Speaker 12:34
Yeah, great question. So what we’ve been talking about, or alluding to, really is what’s called a pure captive, or a single parent captive. And that’s where a business comes in, they established the captive, and it’s, you know, they’re the board of directors, they’re the officers, they control it, it’s for their family of companies. But a lot of other firms will participate in what are called group captives. And, you know, this is for companies or businesses where maybe they didn’t have quite that critical mass to get their own structure going or justify their own structure. But if they pull together with, you know, six, seven, other 1050, whatever number like minded, high performing employers, then you can build some economies of scale. And, and then a lot of those programs will take on new members, each each year. So and that can be run on the property and casualty side. And also on the on the employee benefits side, there’s a number of successful programs out there for different marketplaces.
george grombacher 13:36
Is there some kind of a mechanism in place for the group captive to obviously, you want to do a good job and make sure you’re bringing in other companies that are of the same philosophies and quality and compliance and all those? Is there a mechanism to kick people out? If they fall short?
Unknown Speaker 13:57
Yeah, that’s, that’s something that’s evolved pretty well over time. Because what would happen early on is programs, you know, the promoter, whoever wanted to build it would, you know, they would partner with a carrier to issue policies and then cover the catastrophic risk. And then they would sort of have a come one come all attitude about it to build the program up. As you can imagine, that doesn’t really work. Because, again, the bad risk that you lead in, ends up getting subsidized by the good risk, and the bad risk, people are getting a great deal, while the good risk people are getting, you know, getting hosed. And so that led to failure of a lot of programs. So, that’s what we tell people a lot, you know, you mentioned, oh, why would somebody do it? Why would somebody not do it, you know, the underwriting, you know, or the barrier to entry. You know, the bar is pretty high on a lot of, you know, the better run programs. So, you know, I’m sure in your practice, you see people, you know, hey, send me a proposal and they you know, they send you about 50 per Senator, what you would need to put together, you know, put together a comprehensive analysis, you know, but they’re like, Hey, can you just give me a ballpark, give me a ballpark. You know, I’m sure you get those guys. And, you know, that doesn’t, you know, we tell people all the time, that doesn’t really work. Everybody wants to get in here. So it’s really you got to put your best foot forward and have your last rounds, your financials, your, you know, your presentation of your business in in good shape, you know, to get to get that participation. And yeah, certainly, if you melt down over time, you know, that you might be asked to leave. And that’s different from, you know, just having a bad year, you know, that’s why you buy insurance is to protect yourself from, you know, from that from that bad year. So, you know, health insurance side, you’re going to have that premature baby, or you’re gonna have that transplant, you know, every once in a while, that’s what the insurance is there for, and that doesn’t get you kicked out of anything. You know, somebody gets hurt, you know, on the job. Building falls over, you know, whatever the case may be, yeah, that stuff happens. But is it? You know, is it systematic? Or is it, you know, is it perpetually happening? And that’s, that’s the type of stuff that, you know, if you don’t keep your house in order, then you may be back in the traditional market before long.
george grombacher 16:24
So what is what is the typical discovery process? Or what does what does? Yeah, what what does the typical process look like people who are listening to say, you know, what, I’ve got a couple of 100 employees, and yet my health insurance is my number two, biggest cost. How do I how do I explore this?
Unknown Speaker 16:42
Yeah, usually, you know, if it’s a, you know, we’ll have financial advisors, property casualty brokers, benefits brokers, they’ll they’ll call us up, and we’ll just start with the, hey, I got a guy, you know, conversation is the, hey, this is my client. What do you what do you think? And then if it says, no, no, it sounds like there’s some things we can do here, then it’s usually a educational or introductory call with the client, talk through a lot of what we’re talking about here, this is what a captive is, you know, tell me about your business. And then, you know, if we decide to make sense to move forward, we have what we call a preliminary feasibility study, where we collect some basic information, copies of policies, company, basic company, information, revenue, number of employees, etc. And we’ll, we’ll prepare a report that says, Hey, these are the these are the strategies that you could potentially implement, that you would benefit from, and we come back, we have a discussion about that. And, you know, and evolve it from there. The education part is key. Because, you know, again, the concept of a captive pretty simple that, you know, that takes 12 seconds, but it’s, you know, the different, you know, the different paths, you can go down, and if we’re going to do that, we want to make sure there’s something there, you know, from the client, at the end of the day, there’s also the different approaches. And, again, a lot of people come in, I need a captive, I need a captive, what’s Alright, well, what does that mean to you, you know, because, you know, the concept will mean different things to different people. So you want to make sure, you know, what you’re going to deliver, and the proposal is meeting up with what they want to get out of it, you know, because we’ll, we’ll have people that can be a great strategy for, you know, again, let’s say addressing gaps in coverage, you know, it’s like, hey, you’ve got, you know, here in California Employment Practices, liability insurance is very difficult, because it’s such a litigious state. Employment Practices claims can actually blow up into class action lawsuits out here. So we’re seeing, you know, in the, in the way the law is written, so, you know, if you have one employee that says, Oh, I didn’t get my, I didn’t get my break, they can hire an attorney. And then if they find one other person, they’ll now take it as a class action. And they’ll assume, well, if you did it to that one person, you must have done it to every employee that’s ever worked at that company. And all of a sudden, you have a class, you know, gotta love it. And the insurance isn’t price to address that it’s, you know, it’s priced to address like, the one off situation where you you messed up and you wronged somebody, it’s not priced for class action stuff. So, you know, a lot of times we’ll make that recommendation is, hey, a captive would be perfect to address this this class action exposure. But, you know, but maybe that doesn’t move the meter for them, maybe they’re in it for, you know, they want to save money on their workers comp. And so it’s, you know, again, identifying kind of the basic even going back to the basic tenants of financial planning, you know, one on one is the, hey, what are your goals and objectives and what are you looking to get out of this and then, you know, making recommendations around that. Even if it’s, you know, hey, this, you know, this isn’t going to work out for you. But, you know, here’s what would and you know, at least at least they took a look but
george grombacher 20:00
Have it. Yeah, that makes sense. Well, Jared, I appreciate you coming on and educating us on cap captive insurance companies probably a long time coming for the show. Where can people learn more about you and risk management advisors? How can they how can they start the conversation?
Unknown Speaker 20:19
Yeah, I really enjoyed it. Thank you for the great questions. So we have a YouTube channel, you can find us on YouTube, a lot of great content there. There’s also a lot of good video and downloadable materials on our website, which is www dot risk, MGMT advisors.com. And then Facebook, Instagram, as well.
george grombacher 20:42
Well, if you enjoyed as much as I did show, Jared, your appreciation and share today’s show with a friend who also appreciates good ideas, find risk management advisors on YouTube, I’ll link that in the show notes as well as go to risk MGMT. advisors.com. That’s right. Excellent. And then the other social media locations as well and I will be sure to link those in the notes also. Thanks again, Joe.
Unknown Speaker 21:07
Awesome. Thank you so much, George. And until next
george grombacher 21:09
time, remember, do your part by doing your best
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