A large university system stands to reap significant benefits by establishing a captive insurance company.
Captive insurance is a self-funded risk management tool that allows organizations to retain and manage their own insurance needs. In the context of a university system, where risks can be diverse and complex, forming a captive insurance company can provide several advantages.
“We were able to really utilize the captive as a formal self-insurance vehicle to withstand any of the wide swings that commercial insurance or pricing within the traditional market would bring,” said Karen Hsi, the executive director for captive programs at the University of California.
The University of California is a system of 10 campuses, five medical centers and three affiliated national laboratories.
The system uses a captive insurance company platform to more efficiently finance its risks, as well as to provide new and efficient insurance offerings to faculty, staff, students and employees.
“A captive insurance company, in its simplest form, is a special purpose insurance company that provides insurance for its owner or owners,” explained Dana Sheppard, deputy commissioner for market operations in charge of risk finance at the District of Columbia Department of Insurance, Securities and Banking.
Washington, D.C. licensed its first captive insurer in 2001 and since then, the city has earned a reputation of being among the leading U.S. jurisdictions for captive insurance.
“A captive doesn’t provide insurance to the general public,” Sheppard said. “It is typically used by an organization in order to retain some or all of its risk, rather than purchase insurance from commercial insurance companies.”
The decision to launch a captive
Traditional insurance policies often come with limitations and standardized coverage, which may not align perfectly with the specific risks faced by a large university system.
By establishing a captive, the university can tailor its insurance policies to address unique risks, ensuring comprehensive coverage while eliminating unnecessary overlap.
The University of California first decided to launch a captive insurance company in 2012.
Prior to that, the university system’s insurance programs “were operated under a self-funded model,” Hsi explained.
Essentially, each location within the system paid an actuarially determined premium that was based on a combination of individual losses, loss experience and exposure base for that particular campus.
Premiums were collected for each line of coverage from the campuses, and when claims occurred, payments would come from that allocated bank account.
“We wouldn’t say it was necessarily sustainable,” Hsi said. “As expected, every year there would be some level of volatility among the different lines of coverage.”
Every line of coverage had premiums, but they were siloed into their own accounts.
After the captive was formed, Hsi said the system was able to achieve “a much more formal, stabilized way of improving our costs, stability and predictability for our campuses.”
From California to DC
Working with the District of Columbia Department of Insurance, Securities and Banking can be characterized as a straightforward and user-friendly process, owing to several key factors that simplify interactions and transactions.
The agency demonstrates a commitment to transparency and accessibility.
“Many organizations may take several months or even a year or more before they come to a decision to form a captive,” Sheppard explained. “Once they do come to a decision, they submit an application to us, and our process is usually 30 days or less.”
The department offers dedicated support channels, including phone lines and email contacts, where knowledgeable representatives are available to address inquiries and provide guidance.
The University of California “is unique in the sense of the scale,” according to Sheppard.
“It is a very large university system with many activities, so there are many more lines of insurance business than you would see in a typical corporation, for example,” Sheppard said.
Still, the process of forming a captive was straight-forward for Hsi and her team.
“Once the decision was made, the District of Columbia Department of Insurance, Securities and Banking made it very easy for us,” said Hsi. “We have since formed other captives, adding to our portfolio, and those happened at lightning speed.”
According to Hsi, the decision to do all of that in D.C. was due in part to the fact that the university actually has a campus in the District, which is called the “UC Washington Center.”
It is a multi-campus residential, instructional and research facility.
“It made sense for our captive to be in a place with great captive laws,” Hsi said. “It also made sense because the university has a presence there, so it was an easy choice for us in multiple ways.”