For Safe Cultures, Insurance Can Become a Revenue Stream

Restaurant operators looking to shed some costs in the New Year might want to look at a new insurance program. Just about every owner large and small has seen business insurance premiums grow dramatically in recent years. But for the right companies, those premiums can turn into a revenue stream.

Everett Newman, the managing vice president vice president at York has a special passion for giving money back to companies via the insurance firms Restaurant Franchise Captive Program (RFCP).

"Our catch phrase is turning premiums into profits. That's in effect what we do," said Newman. "They do pay a market-competitive rate, but the bottom line is their bottom line."

Essentially, captive insurance means a company keeps its workers comp, general liability, auto and property insurance program in house, giving it final say in claims and keeping whatever is left over between claims and premiums.

Newman said the practice started to gain traction back in the 60s, and were a favorite for Fortune 500 companies in the 80s and 90s. But as restaurants struggle to reduce costs and find new ways to save amid growing labor and rent, smaller companies are seeing the value.

There are many insurance companies that can help owners set up a captive insurance program, and a handful of specialized restaurant-centric programs at the state, regional and national level. Markets like California have a special affinity for such programs; large operators in the high-rent and high-labor West Coast make up 65% of the RFCP program.

To date, the program that is operated by York has returned $10.8 million to operators within the plan—after fees to York. But owners should remember that it’s not a quick payoff; it can take about four years to start generating a return. It also requires a special kind of company that is willing to bet on its own operations.

"Generally speaking, when I'm qualifying people to be in our program, I want to have people with good safety programs and good claims process," said Newman.  "But the biggest thing I'm looking for is a positive corporate culture, that’s going to be the greatest indicator of success."

He said strong culture generally means happy workers.

"There's an old saying in our business, ‘Happy employees don't file workers comp claims,’ and that is a truism," said Newman. "I’ve been doing this over 30 years, and workers comps claims is one of the best indicators of a positive corporate culture when it comes to the relationship between owners and workers."

And even when they aren’t beaming, a captive program can help guard against what Newman calls "runaway claims." In a standard insurance setup, the insured has little say in who gets a claim or settlement, which can drive costs up for flimsy claims.

The amount of innovation around safety has also made it easier for restaurants to opt into a program like this, especially progress around behavior-based safety programs and various technologies that help people stay out of harm’s way. He said that’s driven claims cost and frequency down significantly in the last decade.

One strong operator with 65 QSR locations with few claims and a strong safety culture saw 35% to 40% of the premium go right back into the business. On average, the average loss ratio within the RFCP is just under 32%, with an average return of 30%.

For those asking those big "what if" questions, captive insurance can still be a significant bet on their safety protocols, but it’s one that’s hedged by reinsurance to cap any major claims. Under the RFCP, for example, a company can spend no more than 90% of their premiums on claims before reinsurance kicks in.

"It has an absolute hard cap," said Newman. "The maximum worst case is 128%, their max premium for any particular year. That does happen occasionally, but it’s rare."

It’s not for everyone, but for strong operators with a great culture and robust safety measures, a captive insurance plan could be one of the tapestry of cost-saving measures that move the needle.

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