Welcome to Risky Business, commercial insurance with Butler Byers. This is Paul Martin, the business commentator here on Sick AOM. And joining me in studio as our usual guest is Colin Rooke, the commercial risk reduction specialist with Butler Byers. Colin, over the last few years we’ve been doing this program, we have covered the waterfront, everything from looking at what’s the impact of a hurricane and a tornado and a wildfire on insurance premiums, to how does the average small business owner in Saskatchewan actually go to market? How do you become a better customer of the insurance industry? And underlying all of this, you’re always talking about this thing called risk management. So I want to just maybe circle back to that and talk about risk management. And you come at this in so many different ways, and if I throw that word at you, risk management, or that phrase this month, what’s top of mind for you? What comes to top of mind when you hear that?

Well, it’s a good point. So we always talk about risk on the show and new and emerging risks, new trends. I think we’ve talked about cyber once or twice as an example.

Or 200 times or something.

Yeah. Cyber show with Paul and Colin. But we look at risk and the traditional insurance policy as just one tool that we use. It’s not the only tool. It’s part of the process. And when we’re having these conversations with our clients that have gone through our risk reduction workshop, when we finally get to the plan, what we are going to do to become better customers, what we are going to do together to reduce risk, we categorize that into five different areas. So we talk about a risk avoidance, things that we can do together to avoid certain risks entirely.

That’s always part of the plan. Second is risk mitigation. If we can’t avoid something entirely, can we reduce it? So if we’re talking about employee turnover for example, and the cost of that to the company, we may never get to the point where no one leaves, but we want to focus on as few people as possible. So risk mitigation in that sense. Are there ways we can transfer risk? Usually that’s contractually, so I talk about how often we are reviewing contracts and leases that our customers are asked to sign and we look for ways to move the risk from our client to someone else if at all possible. And then we talk about risk financing. Now depending on who you’re talking to, they’ll have a different term for this, or a different definition. When I mention risk financing, I’m referring to the traditional insurance policy.

When you pay a premium to a insurance company as a way of having that company protect your business against future claims. I mean it really is just a method of financing. Set aside some funds and then if you need more funds it’ll be there too. And then lastly we talk about assumption, and risk assumption is the costliest form of risk management. So we get in the habit of saying, okay, this is what we’ve talked about, this is what’s insurable. But here’s all the areas that aren’t, and that’s a really big portion of our risk management plan. We talk about, okay, these are some of the biggest cost factors in the business and these are items that are affecting your company each and every day and there’s nothing we can do about it.

But we’re also quick to reference that the second most costliest way to deal with risk is the financing of risk by insurance policy. So we’re used to having those conversations with our clients in each and every risk management plan. Today I want to talk about something that’s a little different. What if we said to our clients, we can get out of the insurance market altogether. You don’t have to purchase a policy at all from one of the large insurers in Canada or United States or globally. And when we say that, there’s often a lot of eyebrows that will raise like, what are you talking about? We’re not going to self insure the whole company.

Yeah, We’re not going to go bare on this thing. Go naked on it. Yeah. We’re going to need to get someone with deeper pockets than us to play the game with us.

You’re good. You’re not that good at working on risk. And so I want to introduce the idea of Butler Byers can help you purchase your own insurance company and it’s called an insurance captive. So when you think about an insurance captive, it is a separate entity from the business altogether. Again, you are purchasing an insurance company. Now there’s different ways you can structure that. So you could have common shareholders that would own the business and also own the insurance captive, which is quite common. Or you can have shareholders that will own a business and that business will own the insurance captive. But really the idea is we work together and help our clients form their own insurance company, which effectively takes them out of the purchase and placement side of insurance. When you own the company, you set the rules, you charge your own company for your premiums. But this whole idea of going to market and negotiating rates and should I switch insurers and that whole application process, we can eliminate all of that and it can be quite advantageous to our clients.

It sounds almost like, well not magic but magical.

Yeah, it does sound out there, but it’s actually quite common. And it’s not a loophole. It’s not something that we’ve made up. You would be purchasing your own insurance company. It can be domiciled in Canada, can be domiciled in the United States, it can be domiciled off shore. But just to give some context, it has to have all the same functions of an insurance company. In fact, any insurance captive, it would still be subject to rules and regulations wherever you are located that would apply to any insurance company. So this is a real thing.

Your company would have to issue policies, it would have to collect premiums, you’d have to have claims staff, actuaries, the whole thing. Now it’s not as complicated to do as you would think. Really it’s just a matter of working with us. And together we select a captive and find an appropriate captive manager that would look after a lot of the functions. But again, thing and it is an insurance company. It’s not something that looks like an insurance company. It’s just the idea that you own your own insurance company.

There’s a lot of things in this realm of really, we’re talking about financial matters here. And there’s a lot of things that small business owners in particular small, medium-sized businesses just simply don’t get exposed to. And that’s probably even more so in a province the size of this, where our market place is the size that it is. That you just don’t hear about.One of the things that as a business writer, I sometimes do some work on, there’s a thing called an individual pension plan. But in all, I talk about it with business owners and they go a what, and I’m frankly quite surprised that I know about this. They don’t know about it. So it says to me, the industry isn’t talking very much about making that sales pitch, but part of it is just simply we aren’t exposed to that kind of stuff. So this notion of a captive, as you call it, you say it’s common, but yet nobody’s talking about it. So how common is common?

Yeah, so on that note, 60% of the world’s insurance premium is currently domiciled inside of an insurance captive. So when you say common, it’s on some level more common to be in a captive then actually purchase a policy. But when you’re looking at the masses, these are traditionally very large companies that have entered into an insurance captive 15, 20, 30 years ago. What’s not as common is, having this conversation with a medium-sized company, and the reason why it’s not happening and certainly in Canada is it’s non-traditional. If you look at the typical role of an insurance broker, it’s just not how it’s done. We take in an insurance application, we go to market, we negotiate on behalf of our clients and we place them with someone else. Well, what if we’re placing your insurance with your own insurance company, and that’s all I’m suggesting here. And I want to touch on I guess a little bit on the types of captives or what is this thing?

All right, I want you to hold that thought. We’re going to take a little break and when we come back we’ll pick that up. And I want to also explore, is this just for the really big companies or can average smaller, medium-sized businesses play in this? You’re listening to Colin Rooke, the commercial risk reduction specialist with Butler Byers Commercial Insurance. We’re going to take a little break. We’ll come back after this.

Welcome back to risky business commercial insurance with Butler Byers. Paul Martin here, your host, sitting in with Colin Rooke, the commercial risk reduction specialist with Butler Byers Commercial Insurance. Just before the break we were talking about these a, you raised this notion of captives and I cut you off there. You had a thought process going, so maybe I’d better let you just pick up where we left off just before the break.

Yeah, so I want to talk about this. There’s four main types of captives and I won’t go into great detail, but just give a brief summary of what that looks like for those that are listening now and saying, I haven’t heard of this before. This is new to me. So one of the more common types of captive is a single- parent captive, which is 100% owned by the company. There’s no other members inside of this captive, so you have complete flexibility as to what coverages you would put inside that captive. You are standing alone. So types of coverage could be auto liability, general liability, errors and omissions. Cyber, which we talk about all the time when they show benefits, employee benefits, longterm disability, any predictable risk. When you own the insurance company, you can choose to place those coverages inside.

Now, as part of a single-parent captive, there’s what’s called, this is the term, it’s rent-a-cell and you’d think there’d be a fancier name for it, but it really means you are renting a portion of somebody else’s parent captive. Now, that’s great for smaller businesses that want to enter into insurance captive. They’re not ready to, I guess jump off the deep end and it is increasingly becoming more common. The challenge though with renting a cell, look at it like you’re not the landlord, you’re a tenant and the parent is the landlord. Anything that you would want to do inside of that captive, you’d have to seek permission. So if maybe your cyber liability isn’t in the captive now and you’d like to add it, you’d have to ask.

So there’s that side of it, but the most common is group captive and this is groups of like minded companies that are tired of paying high premiums and not seeing any benefit of that, that are working on risk management. Making that first and foremost in their business that say, okay, we’re like minded. We want to gather together where everyone shares in the risk, and it could be all one industry or it could be dozens of different industries, but these companies have similar methods of thinking and they say, okay, again, risk management is first and foremost. We’ve done the actuarial analysis and looking at our claims history and the cost of entry, we would have won that race and as would the group, we all want to reap the benefits. So that’s a very viable option. It’s certainly a great option for a medium-sized plus company.

And the last one, which I find very interesting is called an enterprise captive. Enterprise captives exist for placing coverages where there isn’t insurance available. And so basically you would form this thing to devise or create policies as long as there’s data available to allow coverage for your company for something you can’t buy in the market. So I mean if you can imagine you could create your own insurance for example, for if a top employee leaves, you could say, okay, I’m going to pay some premium and if my top salesperson leaves, I’m going to put in a claim and there’s going to be a payable amount to my company. You are allowed to basically think outside the box and form this thing. So if anyone listening currently is saying, there’s coverages I wish were available in my industry that just aren’t, they are available. You can create that yourself and you can design it.

We need you talk about this group thing. What comes to mind for me and correct me if I’m wrong on this, is that smaller companies can entertain this idea.

Yeah, absolutely.

This is not in the realm of, well if you’re under only the billion dollar club or something, this is much more accessible than most people would think it is.

It is. It’s a lot more accessible than you think. And there is a bit of a barrier to entry. You want to be in a position where you are paying enough premium that the cost to create this thing are going to be worthwhile to your company. Even the consideration I guess of entering into an insurance captive, we would do what’s called a viability study and a feasibility study.

So we can provide analysis saying, looking at the cost claims history, the structure of the company, where the company’s going, this does make sense and here’s the rationale behind it. But when you look at any business, and certainly on the liability side, if you look at all the money that would go out or again you add in the group benefits, longterm, short-term disability, key man insurance, buy sell agreements.

And you think, I can house that all inside of a company I own and have the same functions. I pay a premium. And from there you say, okay, well what’s the difference if I’m paying a premium now to a typical insurer versus my own insurance captive, why would I do this? The difference being the profits are yours, the dividends are yours, the investment returns are yours. And if you’re focusing on risk management and your captive is collecting premiums that you aren’t using, the actuaries can release those premiums back to you. So if you think about it, so all I got to do is be a great risk, work at not using my premium. And after a few years I start getting that premium back. And that’s exactly what I’m saying.

So we spent a lot of time talking about that company that looks at the insurance company and says, why are my rates going up? I haven’t filed a claim in 10 years. This is the way you fight that. You say, “I haven’t filed a claim in 10 years. I need to talk to you.”

And you’d be amazed how often we hear, this is a 40-year-old company. We haven’t filed a claim once. We pay into this pot and I don’t see any benefit. Well quit doing it. Own the pot.

All right, well we’ve been talking a lot about sort of insurance side of benefits and we’ve got to take a little break here and when we come back I want to start talking about the retirement plans and RSPs, pensions, this kind of stuff, that sort of financial management piece of it if we could. So you’re listening to Risky Business, commercial insurance with Butler Buyers. We’ve got to take a short break. We’ll be back after this.

Welcome back to Risky Business commercial insurance with Butler Buyers. This is Paul Martin and joining me in the studio is Ryan Warner, the benefits specialist who works very closely with Butler Buyers and he sits in periodically to bring us up to date on some of the latest thinking and developments that are going on on the benefit side of commercial insurance. So we were talking about dental plans and these kinds of things before and now we’re going to start talking about retirement savings. And I guess this is where the demographics really come into play, isn’t it? I mean, you’ve got this workforce that is big bulge of boomers, big bulge of millennials, and kind of a you in between there a little bit of a valley. What are the challenges that the industry and employers are facing on this one? Because my guess is the needs are different.

Dramatically different. ]You’re older generations now that they’re approaching retirement are thinking very differently. They’re now realizing, hopefully we’ve put enough away and if we haven’t, how’s that going to look? What are the government benefits going to look like come retirement. So I would say your Gen X and your baby boomer crowd is really in need of education more than any things to feel comfortable with what those next couple steps look like versus the younger generation. I mean, the argument right now is just trying to get them to save at all. So that’s a challenge for employers. But I’m seeing a lot of activity in employers being creative in how they are trying to attract and again, retain the younger demographics and utilizing retirement savings in a different strategy. So it’s really interesting some of the nuances that are out there and really not a lot of change in what’s available, just how it’s being presented.

Well, in Saskatchewan, we’ve laboured under this thought that we have a saving culture. And there was a time when we did it, I think about 1983, 23 cents out of every dollar that an employee earned in this province went into savings. I mean, it’s a remarkable number. We are about two or 3% right now, which is actually a quite an improvement because we were negative two or three, just three or four years ago. So we don’t have a saving culture anymore. And as a consequence, we need to actually be cognizant of that. I think we need to think and talk about that because we’re likely seeing across the country the largest group of people who have no retirement savings heading into retirement.

Absolutely. It’s a huge challenge. I mean I can’t stress enough how important it is to save and yet the world we live in now has changed so much. The youth are coming out a school with greater depth than they ever did before. Purchasing homes is far more difficult now. I mean, the argument there is also they don’t have access to the same money going into school or because tuition is so much higher than not coming out of school with the same resources. Incomes really haven’t gone up that much either. So all of these factors combined together make it very difficult for the younger generation to start the saving process. And the older generation, that hasn’t put enough away, I mean that’s possibly a big factor as to why they’re working so much longer as well. Not just because they want to.

Or that they’re fit and they’re living longer, but they actually have a need. Well, you constantly see headlines, for example in the business media that more and more people are going into retirement carrying debt, which would have been unheard of not so long ago. And it really is kind of counterintuitive. You think when I retire, everything should be paid for and I’m just going to live off this reduced income stream that’s going to come from a pension retirement or a retirement pension plan. World’s kind of upside down on this. So you were talking about what caught my attention was your reference to student loans and student debt. That one is really complicated. And I suspect you probably see it regional too, where if you’re trying to buy a house in Toronto, it’s quite a bit different than trying to buy a house in Saskatchewan to start with. I mean, our prices are more reasonable. But what are you hearing about this kind of stuff? What are the young people saying to you and to those of you who form these kinds of benefits plans? What are they saying that they need or simply can’t cope with, can’t deal with?

Yeah. As these individuals are coming out of school, they’ve got their ticket, they’ve got their diploma, whatever they’ve gone for, and now they’re ready to get that first job. And these employers have these great programs available. So there’s some kind of a savings platform there hopefully geared towards retirement. But as a younger individual coming out of school with all this debt, it can be a challenge to try to do everything. Right? I mean, we’re trying to teach them that they can’t do everything and sometimes it’s more important what they’re doing on the weekend. But as far as the debt versus participating in the retirement plan goes, it can be really tough on that individual to decide. Right? So what most plans do is offer some kind of a match. So, 3% that the employee has to put in, the employer is going to match it, which sounds great.

But if the employee is struggling with debt to the point where maybe they have to make the decision, that can be a really challenging choice. So we’ve seen now a development in the industry where now there’s a provider out there that’s willing to set in place a program where the employer will still make the match to, say an RSP program, but the employee’s 3% would go towards their debt repayments. So it’s a method of attracting somebody to join you and helping them understand that not only is this a great place to work, but we’re going to help you pay down your student debt and you’re still going to benefit from the retirement plan. So if you have to make that choice, we’re not going to force it on you.

So the young person would basically just have to demonstrate, I am indeed retiring my student debt and if I can do that, then the employer side will still contribute to a retirement plan. So it’s half of what you would normally expect, but it’s something.

That’s right. I mean in the event that somebody had to make that decision and said, “I can’t participate in this plan,” now they’re losing the full six. So I think something is always better than nothing, regardless of age.

I guess if it’s a group RSP, you get that deduction. So you get that little bit of a boost at tax refund time. And there is a saying in the financial world, time is your friend. So the earlier you can make a contribution, even the small 3% one can have a big difference at the back end if you’ve got 40 years or 50 years to see that money grow.

If I showed you some of the charts we put in front of employees when we’re doing education, I mean it’s scary the difference it can make. So starting as young as possible is obviously ideal.

Well, interest rates have a big factor in all of this too. I mean, I noticed the other day the federal finance minister came out with their interim financial statement and Ottawa’s deficit went up $7 billion and they didn’t increase spending. So there’s lots of spending announcements, but the money hasn’t left, but it went up. And why it was unfunded pension liability. That $7 billion was pension that they owe to government employees that will have to be paid down the road. People don’t have any idea of how sensitive that marketplace is. So you’ve got the federal government going deeper and deeper in debt, standing still simply because interest rates are going down.

There are problems from top to bottom in this system and frankly it’s all just not saving enough or not putting enough away. So government, personal, regardless of where you sit, if you’re not putting something away, you’re in big trouble.

So it’s look after yourself in this one? What are employers or businesses, commercial operations with payrolls, employees opting for? Do you see more development of pension plans or is it more group RSPs or can you be that just straight forward in that description?

Well, I think there’s a lot of RSPs going on out there that is the easiest to implement. It’s simple from an administrative perspective, that’s the most common. Certainly in the small to mid size companies, pension plans get a little bit more complex so that can be challenging for the small to midsize business to to get involved with. I mean we haven’t seen defined benefit pension plans set up in years, so it’s just defined contribution pension plans, which frankly you can structure an RSP to operate and function kind of like a defined contribution pension plan, so mostly RSPs I would say.

Well Ryan as always, this time just seems to blast by. I don’t know. I think I’m managing our time very well and I know got 50 more questions to go and all of a sudden the clock says, “no, you’re done.” But thanks very much for joining us. It’s a really interesting topic that is subject to clearly in Saskatchewan we talk a lot about pensions these days. It’s a hot topic that gets a lot of headlines and so thanks for bringing us those insights into how some employers are dealing with it.

Well Ryan as always, this time just seems to blast by. I don’t know. I think I’m managing our time very well and I know got 50 more questions to go and all of a sudden the clock says, “no, you’re done.” But thanks very much for joining us. It’s a really interesting topic that is subject to clearly in Saskatchewan we talk a lot about pensions these days. It’s a hot topic that gets a lot of headlines and so thanks for bringing us those insights into how some employers are dealing with it.