The Long Haul (Captive Review Article of the Month)

With the largest truckload fleet in the US, transporting a wealth of commodities from retail merchandise, food products, beverages and beverage containers to manufactured goods, paper products and building materials, Swift Transportation Corporation is a genuine American suc­cess story in which the firm's captive has become integral.

Swift began operations in 1966, under the name Common Market, transporting imported steel through the ports of Los Angeles to Arizona and Arizona cotton for export back through to Southern Califor­nia. The company's operating authority was purchased from a descendant of the Swift Meat Packing family, which gave the firm its current name.

By 1984 the business was generating annual revenue of US$25m and by 1990, Swift had acquired 11 motor carriers and grown to an 800-truck, US$125m carrier in its own right.

Growth

In 2004, Swift enhanced its cross-border operation by becoming the first US truck­ing company to purchase a leading Mexi­can carrier, Trans-Mex.

Today, Swift generates over US$2.5bn in revenue and operates over 16,000 trucks. Its cross-border operation into Mexico ships through every commercial border crossing. Swift engages about 3500 inde­pendent contractors to carry its freight.

When James Mahoney, vice-president of risk, litigation and counsel, joined the company in 2003, the number of inde­pendent contractors stood at around 3000. All of these contractors were required to have certain types of insurance - either regulatory or contractual - which were expensive to source, according to Mahoney, and led Swift back into the arms of the captive concept.

"We had been in a rent-a-captive scenar­io before," says Mahoney. "We thought it would be a good idea to form our own cap­tive and offer our independent contractors the opportunity to buy quality insurance at a good price.

"We do have a sense that these folks are our lifeblood and that we should try to take care of them. The benefit to our owner/ operators is a considerable benefit to Swift, because we have happy drivers," he adds.

Swift formed a single parent captive, Mohave Transportation Insurance Compa­ny (Mohave), which offers its independent contractor insureds a number of essential lines, including:

•   occupational accident coverage - de­scribed by Mahoney as 'quasi-workers comp coverage';

•   physical damage coverage for the contractors' self-owned 'units' (the trucking cabs themselves);

•   and non-trucking liability, which is akin to bobtail coverage (an auto li­ability coverage that protects against losses involving trucks being operated without a trailer. Typically, this occurs after the trailer has either been de­livered or when cabs are on their way to collect a trailer pre-delivery). "If they are not under dispatch or under Swift's business - if they're on their own errands, then this coverage comes into play," explains Mahoney.

Mohave also writes small fleet workers comp - for those contractors who have drivers working for them - and passenger coverage. "Our trucking lines are mostly long- or medium-haul and our drivers are often away from home for a couple of weeks at a time," says Mahoney.

"During the summer they might bring their children or their significant others along and so we offer a low-cost accident disability policy."Swift also puts around US$10m of cor­porate workers' comp into the captive. In the first year of its operation the firm also wrote US$10m of auto liability coverage. "Since then we've just done two-thirds of the owner/operator business and a third of the corporate business," says Mahoney.

Swift approached Aon, the firm's exist­ing broker, to manage the captive. "Corporately, we thought it would be best to keep it with someone who had some depth and breadth of knowledge, and who we had experience with," says Mahoney.

Swift boasts a fairly sophisticated cor­porate risk department with a large risk appetite. Although Aon laid out some alternatives for structuring the insurance company, ultimately the decision as to what level of risk to keep in the captive was Swift's. The firm remained true to its corporate profile, opting to retain a high level of risk.Aon is also on hand to source reinsur­ance for the captive, but Mahoney says there is little call for it in Mohave's case. "It's a judgement call," he says. "With the kind of risks that we have, the lines of business that run particularly hot are limited in dollar amount, or are a bit more open to fluctuation are few and far between."

Domiciled in Arizona, Mohave trades off the twin advantages of a convenient location and established regulator)' compe­tence. While Mahoney concedes that there are plenty of other jurisdictions that offer good environments to captives, he cites having your domicile regulator 20 minutes from the parent company's office as a distinct benefit.

"The domicile is important. Make sure that it is a good fit, personality-wise, be­tween you and the regulator)' department," he says. "I'd love to go to the Cayman Islands or Bermuda once a year but I think I could actually do a lot better if I'm geo­graphically accessible to the domicile."

Although when Mohave was being formed Arizona was still a relatively young captive domicile, the domicile already had a substantial insurance department, and has since grown to become one of the lead­ing captive locations in the US.

"Arizona had a couple of captive adminis­trators in a row who were insurance people and who knew what the objective was for companies such as Swift," says Mahoney.

Buy-in

Swift's positive experience of working with the regulator meant Mohave's setup proc­ess was relatively straightforward, with the gap between application and approval no more than six weeks. What proved most challenging, however, was getting the concept off the ground in the first place - the transition from feasibil­ity study to captive application proving to be a difficult process.

"The study had presented the trucking company with the possibility of becoming a small insurance carrier which was rather foreign to truckers," says Mahoney.

"They said, 'Let's stick to our knitting. Why should we do this?' When we showed them the possibility of garnering an un­derwriting profit and also the potential of some tax benefits they agreed gingerly to go into it."

Nonetheless, it still took a couple of years to fully convince everyone involved that a captive vehicle was an appropriate way to proceed for a trucking company.

Having got everybody on side, Mahoney said Mohave was able to work with the fronting carrier to write tailored coverage that was broader than that typically offered to its insureds.

"Our fronter is very accommodating with regard to the kind of language we want to put in the policies," he says. This is es­sential given that Mohave's insureds work on a very slim profit margin and are not necessarily sophisticated insurance buyers or even sophisticated business owners. 

"There are some with a number of trucks who are sophisticated but there are oth­ers who may be so-called 'mom and pop' operations," says Mahoney. "The object of providing them insurance is not primarily to make a profit but to provide them with the coverage that, if we were in their shoes, we would want."

Having said that, Mahoney concedes that most of the lines of business Mohave writes are generating an underwriting profit. Cer­tainly, the captive offers opportunities for expansion, particularly other lines of busi­ness such as TRIA coverage and extended warranties for Swift's owner/operators.

In the meantime Mahoney says the cap­tive has been able to accommodate short-term leaseback agreements to some owner/ operators who have had an accident and need to use a new vehicle in order to meet their obligations."Mohave actually owns a couple of trucks and leases them at a minimal charge so the owner/operator can stay in a vehicle, earn­ing money," he says.

At this stage, however, two years post start-up, Mahoney thinks it is an appropri­ate time to take a breath, consider Mo­have's accomplishments to date and then to think about new lines and new ventures.