The Evolution of Verizon’s Captive Insurance Company Program

CIC Services, LLC recently attended the Captive Live Conference in Chicago, Illinois, as part of our on-going efforts to stay abreast of shifting trends, strategies and regulations in the captive insurance industry.  At this conference, we had the pleasure of listening to Paul Johnson, Director of Captive Operations for Verizon.  Paul has headed up Verizon Risk Management since 2003.

Paul’s presentation not only highlighted the many benefits of owning captive insurance companies, it also demonstrated that a captive’s benefits to the business can grow significantly as:

1. The captive builds up reserves
2. The business better understands its risk and claims history
3. The captive can be used “creatively” to address a widening array of issues (e.g. worker’s comp, health care and ERISA benefits)

Paul started his presentation by saying, “Unlike other speakers, We encourage you to leave your cell phones ON.”  Clearly, millions of us have our cell phones on.  Verizon is a $110 Billion company with 188,000 employees, 37,000 vehicles, 70,000 properties and 110,000,000 square feet of office space.  Needless to say, Verizon has significant risk exposure.  Their Risk Management Department has 22 employees.

Owning and operating captive insurance companies is an essential component of Verizon’s risk management approach.  Verizon currently has 3 captive insurance companies domiciled in Vermont, New York and New Jersey.  Their captive insurance companies average 20 to 25 programs annually (lines of coverage) and 75% of Verizon’s insurance premiums are paid to its captive insurance companies.  Verizon’s captives primarily insure worker’s comp, general liability and auto liability.

Verizon’s captive insurance strategy started “small” in 1995.  As the company has amassed reserves in its captives, it has been able to reduce third party insurance costs over time.  Paul outlined four phases in the evolution of Verizon’s captive strategy.

Phase One  1995 to 2000 – Growth Phase.  It took Verizon a few years to grow surpluses and improve their processes to give the company the ability to write more coverage with its captive.  Verizon stressed the importance of having an excellent captive manager as part of the team.  Captive insurance insured the first $250,000 (deductible) of a claim and then shifted the claims burden to third party carriers.

Phase Two 2001-2003 – Expansion.  Risk Management began working with HR to begin covering employee risk, primarily workers comp.  Their captives had 18 programs.

Phase Three 2003-2005 – Critical Mass.  The captives became the real cornerstone of Verizon’s risk management strategy.  The company focused on internal controls in the wake of the Enron / Marsh scandals.  Programs expanded to 22.  Retained profits grew significantly during this time.  Critical mass led to creativity and Verizon was able to significantly reduce its insurance costs by relying on the reserves in its captives.

Phase Four  2006-Present – Continued Growth.  Programs are up to 25 per year and retained profits have continued to grow.  The captives have improved their claims processing and operational efficiency.  Product liability coverage now covered by their captives.  At this stage in their captive strategy life-cycle, their captive insurance companies have been insuring the first $4 million (deductible) of a claim prior to shifting claim burdens to third party carriers (compare this to $250,000 in the early years).

Verizon now enjoys significant leverage with insurance carriers.  Paul Johnson noted that President Theodore Roosevelt said, “speak softly and carry a big stick; you will go far”… “in insurance terms, speak softly and own a strong captive.”

Paul anticipates that Verizon’s “big stick” will have more creative uses in the future, including possibly covering supplemental life insurance for employees and all or some portion of ERISA benefits and health plans.

Verizon is a massive corporation, but massive corporations don’t have a monopoly on experiencing the benefits of captive ownership.  Small businesses can experience the same benefits by forming and owning 831(b) captive insurance companies.  With a well-crafted long term plan, small business captives can also:

1. Builds up reserves
2. Better understand risk and claims history
3. “Creatively” address a widening array of issues (e.g. worker’s comp, health care and ERISA benefits)

All of these can give small businesses greater financial flexibility, better risk management and increase profits.

Sincerely,

Tom King

Phone – 865- 386-4920

E-Mail – Tom@CICServicesLLC.com

Web –  www.CICServicesLLC.com