A leading restaurant chain with more than 1,700 locations – including corporate stores and franchise-owned restaurants — had concerns about how product contamination exposure could impact several of their restaurants. Historically, the client did not purchase commercial coverage to insure the risk due to minimal claims experience. However, rapid growth in the expansion of their franchise led to increased exposures. Our Marsh Captive Solutions practice was engaged to assess the potential value of incorporating a captive to insure this risk as well as others, including earthquake and windstorm deductibles.
Considering the potential magnitude of the product’s contamination risks, the Marsh Captive Solutions team worked with Marsh Industry specialists to determine the optimal limit and coverages the captive should assume, along with the appropriate premium, versus which risks should be transferred to a commercial insurer. The team also identified other high-severity risks that were currently being retained, but could be of value to insure through the captive. With several high-revenue restaurants located in hazard zones, it was recommended that earthquake and windstorm deductibles be included in the captive as well. This process helped to define the optimal business plan for the captive, providing potential tax efficiencies and greater financial stability for the organization.
The feasibility study demonstrated that the client could use a captive to formally segregate funds over time in a regulated entity to mitigate the impact of an unexpected product contamination claim instead of buying the coverage from the commercial market. This will allow the client to set aside the premium in their own captive. In addition, the captive will help the organization to reduce their long-term dependency on the commercial market, especially within the first layers, for other risks such as earthquake and windstorm. In addition, the client will gain potential tax efficiencies surrounding the buildup of excess funds that could result from favorable loss experience.
As organizations and the risk environment evolve, many organizations are leveraging captives at the core of their risk management strategies. Having captives at the core helps companies accelerate corporate objectives, support business units, access alternative risk capital, and protect human capital.