SDIC is domiciled and licensed in the state of Hawaii in March 2024. Hawaii is a well-established captive domicile in the US with over 255 captives and experienced insurance regulators. The Hawaii captive legislation is one of the most competitive in the US regarding permitted lines of business, capital requirements, premium tax on captive assumed business, and investment restrictions.
What is SDIC and why was it formed?
SDIC is a captive insurance company which is owned by franchisees to insure franchisees for their Workers Compensation, General Liability, and Non-Owned Commercial Auto Liability risks. SDIC is a wholly owned subsidiary of a holding company, Square Deal Insurance Holdings LLC (SDIHLLC) for which franchisees will serve as shareholders.
No, participation in this insurance program is not required. However, the greater the participation, the greater the potential premium savings to all that do participate resulting from a larger pool to allocate program expenses.
SDIC provides franchisees with the following benefits:
- Premium savings based upon favorable claims experience
- The reduction of dependency and reliance on the commercial insurance markets for availability of insurance
- Premium stability versus the volatility of the commercial insurance market
- The ability to capture investment income on premium cash flow
- A single turnkey insurance solution
- Consistent support through a single program framework for franchisees on coverage questions, claims advocacy, benchmarking claims, and safety metrics.
Yes, all franchisees regardless of size will potentially see premium savings over time. However smaller franchisees will see smaller dollar savings as their premium is smaller.
Yes, there are one-time expenses that will have been incurred to build the SDIC program as it relates to legal expenses, consulting expenses, actuarial fees, regulatory fees, banking fees, and system expenses. QSCC has fronted such expenses and will be repaid by SDIC via the premium it collects.
The risks associated with forming a captive insurance facility are primarily the underwriting risks whereby premiums are not sufficient to cover claim costs and operating expenses. This is why the actuarial work is a critical piece in determining the optimal premium levels needed to pay claim and expenses to ensure the captive does remain financially solvent. Should the underwriting results not be optimal, the capital contributed by each franchisee may be at risk.
Marsh has been selected as the Program Administrator and Captive Manager for the SDIC program. Marsh manages over 1,900 captives globally and is ranked as the largest captive manager in the world operating for over 50 years. They are a leading provider in the quick service restaurant space and are providing the following services to Wendy’s franchisees as it relates to SDIC:
- Program administration for franchisees including issuing quotes, handling enrollments, billing premiums, and issuing policy documentation
- Placement of excess insurance (above SDIC’s retention)
- Financial reporting for SDIC and overseeing regulatory compliance
- Coordination of SDIC board meetings, SDIC financial audit, and actuarial services
Scope of insurance coverage provided by SDIC
The SDIC program provides franchisees coverage for their Workers Compensation, General Liability and Non-Owned Commercial Auto Liability risks. Since SDIC is only licensed in Hawaii, an AM Best rated commercial insurance company licensed in all states where your risks reside will “front” the policies and reinsure a portion of the primary layers of risks to SDIC. Therefore, SDIC is not a direct writer but rather a reinsurer. In the future SDIC may expand to offer coverage for other lines such as Property and Employment Practices Liability.
Yes, captive insurance companies are governed by insurance legislation in numerous jurisdictions around the globe and in over 35 states in the US. Captives are regulated with scrutiny by the state insurance departments in the US in the states that permit captives. Captives are subject to annual filings and exams to ensure they meet strict solvency requirements. SDIC will also be audited annually by a leading insurance company audit firm.
Yes, SDIC is only responsible per claim up to a certain threshold for all lines of Casualty coverages. The commercial “fronting” insurer will assume the risks above the captive retained threshold.
Yes, the total limits provided to each franchisee are a minimum of $2 million per occurrence for General and Auto Liability per the insurance guidelines outlined in your Wendy’s franchisee agreement. The Workers Compensation limits are dictated by state statutory requirements.
No, initially SDIC will only insure Wendy's locations, yet may consider in the future expanding access to non-Wendy’s entities.
SDIC insures only the Auto Liability risks associated with using hired non-owned vehicles for business purposes. Franchisees are responsible for procuring separate Auto Liability and physical damage insurance for its franchise owned vehicles. In the future as SDIC builds equity, the captive may offer coverage for such franchise owned vehicles.
Yes, each franchisee is required to procure Auto Liability coverage for hired non-owned vehicles that may be used in the course of supporting your operations. For example, if an employee is running an errand to pick up supplies for the restaurant and has an accident, your business Auto Liability policy would cover that claim.
Yes, it will be covered under your General Liability Policy.
A risk purchasing group is a legal entity that is formed and approved by the Hawaii insurance regulators that allows franchisees to procure General and Auto Liability coverage via the SDIC program as a group under a single master policy. This eliminates the need to issue separate policies to all franchisees significantly reducing the administrative costs associated with the program.
Yes, Marsh can provide support to not only enroll in the SDIC program but also can provide insurance solutions for other coverages such as Property (for all owned franchise properties), Employment Practices Liability, and Excess Liability.
Since Property claim costs are more challenging to predict and can be more severe in nature, it is not an ideal coverage to put into a new captive with limited financial equity. Over time though as the captive builds equity (surplus), SDIC may consider taking on a portion of franchisee Property risk.
It is not the intent to insure non-franchisee risk initially in SDIC, so only the franchisees will be eligible for coverage. In the future, the Company may elect to pursue insuring Company restaurants through SDIC. At that time, the Company would complete the application process and contribute capital in the same manner as franchisees.
Your ownership in SDIC: How it works
Yes, each insured franchisee will need to post a one-time capital contribution to the Square Deal holding company that equates to the sum of the following:
- $500 per franchise, plus;
- $500 per store under ownership of the insured franchisee, plus;
- 20 percent of their first year SDIC premium.
The contributing capital serves as a buffer for any unexpected volatility in claim costs. Additional capital may be required if the cost of claims deviates from what is projected and exceeds the premium and capital collected. Also, SDIC will require that capital continue to be a ratio of 20% of current premium, so if your premium increases significantly so will your capital over time. Otherwise, the capital contribution will only be required one time in the year you enroll.
Each franchisee who qualifies to be insured will purchase their membership units from the holding company, SDIHLLC, which entitles them to ownership in SDIC since it is a subsidiary of the holding company. Each insured franchise organization will purchase the following:
- One A Unit at $500 per unit with voting rights, plus;
- One non-voting B unit per location at $500 per unit, plus;
- The number of shares at $500 each that will equate to 20 percent of your first year SDIC Premium.
An example is as follows for one franchisee with five stores and $75,000 in year 1 SDIC program premium:
- One A unit at $500 per unit with voting rights, plus;
- Five non-voting B units per location at $500 each which equates to $2,500, plus;
- 30 shares at $500 each that equate to $15,000 which is 20 percent of your first year SDIC Premium.
- The total contributed capital would be $18,000.
Each enrolled franchisee will be required to execute the Shareholder Agreement for its ownership in the Square Deal holding company and indirectly in SDIC.
The capital may be posted in cash or a letter of credit.
Yes, should you no longer be an insured under the SDIC program, your interest as a shareholder will terminate and your capital will be returned in full after five years from the date of termination in the program or five years after all associated claims with the insured have been paid.
There will be full transparency to you as a shareholder to view financial reports for SDIC. We will have an official annual shareholder meeting and then the board will meet either monthly or quarterly.
The Company will not contribute capital to SDIC at the present time, nor will it control SDIC. In the future, the Company may elect to pursue insuring Company restaurants through SDIC. At that time, the Company would complete the application process and contribute capital in the same manner as franchisees.
Although it is possible that a franchisee may receive dividends from SDIC, SDIC’s current goal is to run at a break even with minimal profits and utilize such profits to reduce future premiums for participants. A franchisee cannot receive a dividend from SDIC until the board approves such distributions and the franchisee has held a common share for a set number of years.
How premiums are determined
SDIC premiums for each line of coverage will be determined by taking a premium rate multiplied by the exposure (payroll for Workers Compensation or sales for General Liability) for each location. Premium rates will be based upon projected claim costs plus a load for allocated program expenses and may vary by state. Thus, locations with larger sales or payroll will pay greater premiums than smaller locations with lower sales or payroll.
Allocated program expenses may include the following:
- Administrative expense payable to the fronting insurer for providing coverage to franchisees along with associated premium taxes
- Claims administration fees payable to a third-party claims administrator
- Brokerage fees paid to Marsh to negotiate the terms of the placement for excess coverage above SDIC with an AM Best rated commercial insurance company
- Operating expenses for SDIC, including program administration, captive management fees, audit fees, actuarial fees, legal fees, and premium taxes
Estimated payroll and sales will be used to determine estimated premiums billed at the inception of the policy and then actual payroll and sales will be collected at year end to adjust the final premium due in a single premium adjustment.
It is the goal to vary premium rates for each line of coverage by geography to account for varying cost levels to adjust claims in different jurisdictions.
There may be requirements that each potential SDIC insured must meet to participate in the SDIC program such as not exceeding a certain claim ratio (total claim costs in relation to total sales) in the past five years and safety audit compliance results.
There will be ongoing efforts to monitor claim activity, but more importantly, safety activities as well. There will be a scorecard system where your site safety audits and your claim metrics are used to determine a score to show you how you are performing in relation to your peers. This will help you understand the trends of what is driving claims within your franchise as well as your peers. This information can be used to understand where to dedicate safety efforts and claims management to improve your loss experience and contain costs for SDIC.
No, there is no deductible under your policies with SDIC. Each policy will provide “first dollar” coverage. However, it is important for franchisees to understand the importance of managing claims and safety efforts to mitigate claim costs for SDIC, as the better SDIC Performs, the lower your future premiums will be in the program.
Enrollment process
Marsh is the exclusive broker to SDIC and is the Program Administrator to access the SDIC program. After receipt of your underwriting data, Marsh will contact you to discuss the SDIC premium pricing with you. Marsh may also be reached at 515-200-5626 or wendys@marsh.com.
You may use your existing broker as a consultant at your own expense; however, Marsh will be the official producer of record for the SDIC program for regulatory purposes. Marsh is compensated through a fee paid by SDIC.
After Marsh receives your underwriting data, we will send you a quote once the premium rates have been set for the launch of SDIC. You can reach the Marsh service center at 515-200-5626 or wendys@marsh.com.
Once SDIC launches, you can enroll anytime into the program. You may cancel your existing policy mid-term by giving your existing carrier proper notice as noted in your policy. Marsh will be available to guide you through this transition.
It is necessary to actively enroll the first year. Unless cancelled or non-renewed, your coverage will automatically renew in subsequent years, and you will receive notification of your renewal terms and premiums. The enrollment process allows a franchisee to procure insurance and to become an owner of SDIC. In addition, the enrollment process allows franchisees to review pertinent information needed to complete the procurement of insurance. Each franchisee enrolling will have to execute a Shareholder Agreement during the initial enrollment period in connection with ownership of SDIC.
No, coverage is issued for the franchise, so all locations owned by a franchisee would need to be included.
You will be able to pay in full via credit card or set-up installments with AFCO by financing your premium. Payment options and instructions will be outlined and included with your premium quote.
A mid-term premium adjustment will be completed for any franchisee exiting the system before the end of the policy year or if you need to remove a specific restaurant from your coverage. Any refunds owed based on the cancellation date of coverage will be processed within 30 days of the cancellation date and returned to you.
Insurance documentation
Marsh will distribute your coverage documents by email to you. A self-service web portal will also be available by the end of 2024.
Coverage is secured for the franchise legal entity. If you have multiple franchise entities, you may choose which franchise entities you wish to insure in the SDIC program. You may insure each franchise separately or under a single combined policy. Your premium will not vary with either option.
Yes, a commercial AM Best rated insurance carrier will issue the policies and then reinsure a portion of the risks to SDIC. Therefore, SDIC will not appear on any documentation serving as evidence of insurance for the franchisee.
You may send an email request to Marsh at 515-200-5626 or wendys@marsh.com.
Claims reporting and administration
A third-party claims administrator (“TPA”) is a separate organization from the carrier that will adjust all the claims under the SDIC program. You will be given a central hotline to call to report claims which will connect you with the claim administration firm. Once the claim is reported, an individual claims adjuster will be assigned to manage the claim until it is settled and closed out.
Premiums are determined to ensure they cover the actuarial projected claim costs along with operating expenses. The actuaries rely on historical claim activity going back five years for the group along with quick service restaurant industry claim data to ensure a high degree of confidence in their projections. Should actual claim levels deviate from what is expected, then the captive capital serves as a buffer to absorb that extra cost. Should that capital not be sufficient to make up any underwriting deficit, then the captive insurance regulators will require additional capital be paid into the captive.