Insights

By Richard Cutcher, reprinted with permission from Captive Review, February 2016.

Higher education institutions in the United States are no strangers to alternative risk solutions, and with relatively unique and diverse exposures, it is no surprise a significant proportion turn to captives. In the case of Syracuse University, located in central New York, the support of leadership and a number of insurance carrier policy concerns were the final factors to prompt staff to explore the risk transfer options available.

The 145-year-old Syracuse University formed Orange Insurance Company in May 2015 and started writing insurance effective 1 July, 2015. The institution's full student enrollment nears 22,000, and full-time staff total 3,279. The university has total assets of approximately 2.65 billion.

"This process was prompted by some insurance policy issues with carriers over the allocation of defense costs," David Pajak, director of risk management and chief regulatory compliance officer, tells Captive Review.

"There were also minimal markets available covering the university's risk profiles. That's what prompted us to look at it from a pricing, coverage and service angle and to consider what is acceptable for the institution.

Risk profile

Discussing the risk profile of Syracuse, Pajak is able to reel off a list of exposures, including the university’s 49,000-seater Carrier Dome – the largest domed sports stadium of any college campus in the country. As with any education or sports institution, there are also emerging risks, while students and faculty staff studying or taking part in research abroad adds an international element to the profile.

Traditional workers’ compensation and property damage require attention, too. Some of these risks are insured through the commercial market, while others are self-insured. Syracuse University is a qualified New York State Self-Insurer for workers’ compensation and procures commercial property insurance with a deductible with FM Global.

Pajak and Michaele DeHart, the university’s associate director of risk and insurance and the captive’s secretary, have opted to write commercial general liability and educators’ legal liability through Orange Insurance Company. Taking greater control over their defense costs and selecting the appropriate counsel were strong drivers when opting to write the above lines through the captive.

“We believe it will eliminate any conflict with insurance carriers, while strengthening our administrative efficiencies with claims management processes and our overall systems,” says Pajak. “We intend to achieve savings and decreased costs and we also expect it to provide stability. Providing some budget stability by avoiding any insurance pricing cycles is good. And maybe down the road we can use this as a facility to accommodate some non-traditional, complicated, difficult-to-place risks.”

Pajak and DeHart expect to review the lines they write through the captive in the second half of 2016, and the door has been left open as to the captive’s future use.

Formation

In line with the Syracuse risk team’s considered approach, the feasibility and formation process was equally conservative. The idea of forming a captive was first explored in autumn 2013, when Ken Syverud, the university’s new chancellor, and Louis Marcoccia, executive vice-president and chief financial officer, approved the undertaking of a feasibility study in January 2014.

“At that point we involved a large team of individuals that went beyond the risk management department,” Pajak adds. “We had the office of budget; the comptroller’s office including the staff who deal with tax, general counsel and the treasury’s office were all involved.

“We also had a trustee member who had knowledge of captives and provided advice periodically. That was very helpful to us.

“Managing risk through the captive gives the university an enterprise risk perspective because it can open up opportunities to help better manage risk and protect institutional assets,” Pajak notes.

The feasibility study was completed at the end of 2014 and made the recommendation to move forward with the captive’s formation. It was approved by senior leadership in January 2015, and in May the captive was licensed.

“We looked at Vermont because of its good regulatory framework and their experience with institutions of higher education,” says Pajak.

“The way our structure was organized, we wanted to be a single-member LLC, and that was not permitted in New York. We wanted a domicile that had various benefits, including capital requirements, which are very reasonable in Vermont.”

During the feasibility study and implementation process, the team made contact with peers at other universities which have captives in Vermont.

The university has employed Marsh Captive Solutions as its captive manager, while Old Republic acts as the fronting partner for the commercial general liability, as well as being its reinsurance partner.

Regarding advice for peers in other education institutions that may be considering exploring the captive path, DeHart says, “It is important to assemble good internal and external teams. Without that strong team you can’t move forward with the captive.

“We had an excellent internal team that helped guide us through the process and a great partner from the outside leading us through it – that was critical to us.”

From Pajak’s perspective, it was essential that all players involved in the process were singing from the same hymn sheet when it came to the project’s ultimate aims.

“Knowing your objectives and your rationale, that is the key,” he adds. “If you don’t know exactly why you are doing it, you should not be going through an analysis.

“When you look at financing this risk through the captive, you have to take a step back and ask what good risk prevention you have in place. If you can prevent the losses, you can better manage the risk, and that way the financial ramifications will be much better.”