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Madison Insurance Group – Insuring Enterprise Risk and Loss of Revenue because of Supply Chain Interruption, Loss of a Key Customer, Cyber-
Mark Sims
President
Madison Insurance Group
https://madisoninsurancegroup.org
Contact:
sales@madisoninsurancegroup.org
812-
Follow us on:
https://www.linkedin.com/company/madisonig/?viewAsMember=true
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFO Magazine
Published – January 27, 2025
CEOCFO: Mr. Sims, what is Madison Insurance Group?
Mr. Sims: Madison Insurance Group is a consultancy company that manages and operates two separate insurance companies domiciled in Puerto Rico. There is a direct-
Physical peril does not have to happen for them to lose revenue such as a building being destroyed in a hurricane or a business being destroyed in a hurricane. These are specific events that could happen that would interrupt the revenue. What the policies would replace is not the loss of the gross revenue, but if they lost net income because of the revenue, their overhead cost associated with the revenue and that is what these policies reimburse. At Madison Insurance Group, we manage Madison International that insures those types of risks. They fall under the category of low probability and high severity type risks.
Most other insurance companies will insure business interruption risk, but there has to be known physical peril loss like a fire, hurricane flood, or something like that. The Madison International policies are more specific to a known loss like a loss of key talent. If you have a key person in your business and they leave or something happens to them, they don't have to die or become disabled but they leave for any reason out of your control and you lose revenue and income. Those are reimbursable.
CEOCFO: Do most businesses or businesses that should be using your services, know that this type of policy exists?
Mr. Sims: No. Most of the policies they do not know they even exist with the exception of cyber. Most businesses do not know they can insure those risks.
CEOCFO: Have most businesses heard of it, or is it a new category?
Mr. Sims: It is not a new category; it is just not a well-
One of those biggest risks is cyber. Most commercial insurance companies cover cyber but most have what are called sub limits. You have a million-
CEOCFO: How do you reach potential clients and educate the business world in general about Madison?
Mr. Sims: The distribution channel is where we work with outside advisors. With Madison International, because the policies are so unique, because they are so specialized, the businesses direct-
Madison International uses advisory groups that have a direct connection to who is the advocate of the business, to the business owner or owners, such as CPAs. Maybe they are attorneys wealth advisors or risk managers. It is unique because Madison International is considered to be a foreign insurance company. It is based in Puerto Rico but they are not an admitted carrier to any of the States.
The business direct-
CEOCFO: What goes into crafting a policy for a specific company and how do you evaluate if a company is right for this type of insurance?
Mr. Sims: Just like any insurance company, we are going to underwrite the company’s risks. Some of the policies are considered to be direct reimbursement. One of the policies that would be a direct reimbursement is Madison International will insure for legal defense costs and expense reimbursement. When a business gets sued and goes to court the most expensive part of a lawsuit is the legal costs to defend. For example, Madison International considers insuring a business for legal defense costs and expenses. However, if the business has had four lawsuits in the last two years, Madison is either going to offer lower limits while underwriting a higher premium or not insure them at all.
Everybody goes through an underwriting process just like any insurance company. Insurance companies do not buy risks. In other words, if I have a business and my building is on fire, I can't pick up the phone and call a commercial insurance company and say "Hey I need a property liability policy now because my building is on fire." They will say no. We are going to make sure that they are a good insurable risk. That is how we determine. We then decide what risks they have.
Each insured business is required to complete a risk assessment questionnaire (RAQ). The RAQ will ask about their company where they are located and what they do. The RAQ will then ask specific questions on whether they have key customers, what percentage of the revenues these customers are. We ask if they have key talent, we ask what they do on social media; we ask what kind of risk management procedure and protocols they have for cyber to guard against a cyberattack. These are just some examples that the RAQ will ask.
CEOCFO: Is there an algorithm you use to decide?
Mr. Sims: Madison International uses independent, outside actuarial firms. Once Madison International underwriters collect data, they assess the risk and send it off to an outside independent actuary who determines the policy limits and the cost to insure. They will assess the risk and determine the premium based on the RAQ and other data collected from Madison’s underwriters. I am not an actuary; I don't want to be an actuary. Actuarial methodologies and principles are math, it is assessing data but it works. That is how all insurance companies will determine assessed risk and the correlating premium for the risk assessed.
CEOCFO: Would you tell us about the tax advantages your approach provides?
Mr. Sims: When a business purchases insurance from a third-
If you think about how insurance companies make money, they collect their premiums from their insureds, allocate a portion to their overhead costs, operational expenses, big buildings in downtown Manhattan, Jake from State Farm, etc. They also have to pay claims. After insurance companies pay their overhead, claims and expenses then whatever is left over (the underwriting profit) is given to people like Goldman Sachs and Morgan Stanley to make money on that residual underwriting profit. Said differently, Insurance companies make money on the investments made with the insurance premiums they collect.
In the Madison program, Madison International insures the risk no different than any other insurance company but it doesn’t keep the premium. Instead, it reinsures its risks with a licensed Puerto Rico reinsurer named Madison Re, I.I.
CEOCFO: Why do they do that?
Mr. Sims: Reinsuring its risks with Madison Re (1) provides support and stability for Madison International while (2) allowing the insured (or someone within the insured’s economic family) to realize the investment income and underwriting profit associated with its own risks. Madison RE is unique in that it is organized as a Protected Cell reinsurance company, which allows it to segregate the reinsurance premium it collects within itself through the use of various protected cells. Madison links its segregated accounts to the insurance policies and premiums it collects to fund 50% of any claim that the business had on any of the policies that were linked to that segregated account. The other 50% of that claim is paid by the Madison RE pool account. When the business pays those premiums, they flow down into that linked segregated account. It is in these segregated accounts where the insured’s underwriting profits flow. Underwriting profits in the Madison program are all the premiums they pay less the expenses that they are paid to Madison International and Madison RE, less any of the business’ owned claims. Once segregated to the separate account, the premiums are invested and can grow with reduced tax friction.
Madison RE owns and controls that segregated account. If an insured has any claims, Madison will go in that segregated account and fund 50% of that claim. If a business did this year after year and insures these policies, that by the way keeps these business owners awake at night, i.e. losing a key customer, having a supply chain interruption, having a reputational brand hit, getting sued, or anything that would interrupt their revenue they would be insuring against a potential, albeit low probability, financially catastrophic event. When the business pays those premiums each year, those premiums will flow into that linked account and will be invested and earn investment income. If the business managed to have little to no claims and they did that for several years and for whatever reason the business no longer needs the coverages anymore, all that underwriting profit and investment income gets to be returned to the owners of the business or somebody within their same economic family.
This program allows for a business to insure against the low probability, high severity type risks that keep the business owners awake at night but instead of those premium dollars going to the commercial black hole to be kept by the commercial carrier, they get the underwriting profit investment income returned. To the business owner, the reason they don't buy these types of coverage typically from a commercial carrier is because they may not be offered specifically and they are expensive to buy. Most business owners would say because it is low probability and expensive they will insure with the hope and pray method. They hope and pray it never happens because if it does, the claims are typically financially severe and they in most cases don't have the cash flow to support the loss. However, here they will have the coverage and if they don't have the loss, well that money does not go to the commercial black hole, but rather gets invested in the link and it can be returned.
CEOCFO: Do you deal directly with the clients?
Mr. Sims: We do because the advisor is the trusted relationship. It is such a unique and sophisticated program, we educate the advisors and they know their clients. By the time they want to introduce the Madison program to their client, we get involved.
CEOCFO: When you are speaking with a potential client, can you tell if they understand the benefits?
Mr. Sims: They get the part that they have the risk but they did not know they could insure it. Where it can get lost in the weeds sometimes is how the premiums flow and the mechanics of the segregated account. That takes maybe two or three conversations with the business owner the CFO or their risk management people. Most of them understand the concept right away but the advisor along with our people, helps them get to the details eventually if they are interested.
CEOCFO: Do events like the fires in California prompt interest and action?
Mr. Sims: Those are a loss of revenues through an actual physical peril. What catapulted our company was COVID. For example, my wife and I remodeled our house and we bought these custom-
CEOCFO: What does 2025 look like for Madison and for ERM in general?
Mr. Sims: We look to grow exponentially because we are getting better at getting the message out that this exists. Madison has been around for 25 years and we think the outlook is great, but also the risk could potentially be greater for Madison. However, we are getting more sophisticated in our underwriting process and data collection and data management. We are no different than any insurance company; we have to mitigate risk. That said, we think the future is bright for Madison's growth.
CEOCFO: Put it all together, why should businesses mitigate risk through Madison Insurance?
Mr. Sims: People do not like to pay for insurance; they do not like insurance until they have a claim. In most cases, and these fires are an example, they find out what is not covered. However, if people could buy insurance, know that risk is covered by a third-
Madison Insurance Group | Enterprise Risk Management Insurance | Insurance for Business Risks | Mark Sims | Madison Insurance Group – Insuring Enterprise Risk and Loss of Revenue because of Supply Chain Interruption, Loss of a Key Customer, Cyber-