Who you gonna call?

Gulf Builders RRG Type: Risk retention group
Parent: Homebuilder Warranties
Formed: 2006
Risks: Extended warranties
Domicile: South Carolina
Captive manager: Aon

It may sound familiar. The idea to form a captive insurance company has been thought through, presented to management and given the go-ahead. Then the realisation hits: no-one has done this before. Several months and a few external consultants later, nothing much has happened, and the light at the end of the tunnel has started to resemble a distant pinprick. For extended warranty administration firm Homebuilder Warranties, the move into captive insurance was an arduous and turgid affair. In 2002 the company had set the wheels in motion in form a risk retention group (RRG) in South Carolina to provide liability cover on home-builders' extended warranties, which would then be reinsured by two captives in the British Virgin Islands (BVI). But due to a lack of leadership the programme was going nowhere fast almost three years later. That was until August 2005 when the company decided it needed help. "One individual definitely needs to he accountable for leading a captive project," says Chris Mulgrew, president of Gulf Builders RRG (Homebuilder Warranties' RRG,), who was called in from outside the company to catalyse its formation. Mulgrew had experience with captive insurance after setting up Castillion, a professional liability captive, for an emergency physicians' group in Cayman in 2001. Homebuilder Warranties recognised the need for guidance, so Mulgrew was called in to take the company by the scruff of the neck and give it a good shake.

Taking the reins

Despite having successfully carried out a feasibility study, having Aon Insurance Managers in place to manage the RRC and captive manager Atlas Insurance Management on board and waiting to oversee the formation of the two reinsurance captives, the project had stalled. Procrastination and internal uncertainty over who had the final say on decisions was making it impossible to galvanise the project. Mulgrew's task was to unite members of the company, along with the various third-party service providers involved in the formation of the vehicles, in order to push the project towards the finishing line. "The process was taking far too long. You should be able to set up a structure like this in three to six months. There were some inefficiencies at this end, so I was brought in to get things together." says Mulgrew. "No-one was driving the bus. Part of the problem is not many corporate management types know a great deal about the captive industry, so the people they start working with are all external consultants, generally, consultants give you options and then you need to give them direction. The corporate guys wanted to do the deal and the external contractors were ready to do it, but no one was telling anyone what to do, so I came in to bridge the gap. Atlas was also sitting ready to go but waiting on someone to push the button and give direction," he says. According to Mulgrew. this is a common problem, Sonic-limes a fresh set of experienced eyes is what is required to bring several participants and third parties together to work to a framework of clearly defined actions and goals. "This type of situation happens a lot. From a risk management perspective it makes sense for a corporation lo move into the captive market, but they don't really know how to do it and consultants don't want lo take ownership of making decisions." he says. By the start of 2006,Homebuilder Warranties finally had an RRG ready to write business under Aon's supervision. The RRG, Gulf Builders RRG, is supported by two reinsurance captives based in BVI, Bishop Latimer Re and Investors Re, which were also licensed in January under the management of Atlas. The policies are structured so that the builder retains between 10% and 20% of the risk, the RRG retains 10% of the risk and the remainder of the risk is placed on a 50/50 quota share split between the two captive reinsurance companies. The captives were formed by two separate investor groups who decided to form separate captives to split the reinsurance deal, rather than form one captive in which the groups split the risk 50/50.

The big idea

The move to form a captive programme had initially developed because Homebuilder Warranties was struggling to compete with large insurance firms. It decided to set up the RRG partly to become more competitive with the insurers by offering an insured product and also to address a perceived lack of service and choice in the homebuilder warranty market. "Homebuilder Warranties was getting beaten out of the market by companies that had an insured product. The company had the option of either getting some backing from one of the major insurance companies such as Swiss Re or Liberty Mutual or setting up its own captive structure with reinsurance in BVI and selling its own product" says Mulgrew. The company opted to form an RRG to service the homebuilder market. The RRG offers an extended warranty product, so the policy only kicks in after year two. However, the key selling point for the RRG is while traditional warranty insurers will wash their hands of any activity arising in the first two years, the RRG intends to offer risk management services and claims dispute resolution from day one. "Insurance for homebuilder warranties is dominated by large companies which nave no customer focus. Because they are extended warranties these companies say not to call them if anything happens in the first two years because they have no exposure and are not involved. We are trying to bring warranty administration to the table from minute one. If the builder goes bankrupt we cover on a first-dollar basis," says Mulgrew. "These larger companies are trying to bundle general liability with home-builder warranty for the homebuilders and take advantage of that. We can provide some efficiency by providing a well-priced insured product for the home warranty and allowing the homebuilders to shop for their general liability cover." Rather than deal with builders and homeowners directly in claims disputes, the RRG employs the services of Aces Builders' Warranty, a third-party administrator. This additional attention to risk management is a key part of the RRG's function, says Mulgrew.

Texas and beyond

At the time of press the RRG had commenced local operations in Texas, but Mulgrew intends to capitalise on the company's new-found momentum by expanding the RRG's capabilities to meet a wider client base. The company plans to develop a national product for homebuilder warranties and Mulgrew foresees an eventual growth into other insurance products, such as specific policies for mobile or pre-owned homes, or even general liability for homeowners. "We are ramping up operations and looking to get this show on the road. We've been in the process for three years and everybody is a bit stunned that now we have to actually get going. "We are looking forward to getting into business and trying to expand the concept. We've already started getting homebuilders to submit applications so we just need to get some applications in tile pipeline through the underwriting process and start taking cheques," says Mulgrew.