A cooperative consisting of members that support the farming community has flourished and is preparing to use its captive to meet unique risks it may have to face.

With guidance from Bob Davidson, managing director of captive consulting and underwriting at Iroquois Captive Services L.L.C., The Alabama Farmers Insurance Co. for Cooperatives was formed to reinsure property/casualty insurance deductibles for its members, which include retail locations that sell bulk feed, fertilizer and seed to farmers.

Alabama Farmers is a self-managed captive that members of the Alabama Farmers Cooperative Inc. formed 18 years ago.

Originally domiciled in Vermont, the captive was relocated to Alabama, due to Alabama lawmakers passing legislation in 2006 allowing captive formations as well as its convenience of location and tax savings, said Walt Black, the Decatur, Alabama-based corporate risk manager of the cooperative.

Prior to the captive, each member purchased its own property/ casualty insurance. With over 60 locations, the premium costs were large and would only increase, he said.

“The captive allows all members to be on the same insurance policies and for these insurance policies to have much higher deductibles, saving on premium expenditures,” Mr. Black said.

Having the captive reinsure the deductibles prevents a member from incurring the full impact of a large deductible if they have a claim.

“For some members, especially those in areas where less farming is taking place, incurring a large deductible would have a severe financial consequence on their business,” Mr. Black said. “That's just not sustainable for some entities.”

Now that the captive has accumulated a surplus, the cooperative is finding new ways to utilize it. Recently, the cooperative started writing flood insurance out of the captive to keep the premium in the captive instead of paying a commercial insurer, he said.

The cooperative covers about a dozen of its properties' flood insurance.

Recently, the traditional agri-business insurance market has become reluctant to accept risks inherent to fertilizer components such as ammonium nitrate. Insurers require prevention and mitigation systems for fire suppression, early detection and alarm devices that are incompatible with the corrosive environment of bulk fertilizer storage, Mr. Black said.

“Installing these devices can require constant maintenance and would need replacing in a few years. We would spend thousands of dollars to put them in place and then spend it again a few years later. This would not be cost-effective,” he said.

To control costs associated with the liability of handling fertilizer components, the cooperative is weighing having a $1 million to $2 million layer in its captive with excess insurance above that.

While this would still rely on a commercial insurer to be the fronting company and provide the excess insurance, “this strategy can be a win-win for both Alabama Farmers and the commercial insurer,” Mr. Black said.