Before defining group captive insurance, let's first answer the question, "what is captive insurance in simple terms?" Captive insurance is an alternative to traditional insurance where a business provides coverage for their own insurance risks by joining or forming their own licensed insurance company. When a business forms their own captive without anyone else, this is known as a single parent captive.
A group captive is the same basic idea, but instead of one company participating, a member-owned group captive is owned by multiple, separate organizations who join together to buy insurance as a group, retaining and sharing risk.
In this blog, we'll be talking about these member-owned group captives, which are owned by the participating member organizations.Another structure, calledrented captives,is when the captive is owned by a third-party but allows other businesses to participate.
How Does Member-Owned Group Captive Insurance Work?
Think of it like a group fund, which each member pays premiums into which are used to pay claims and to operate the insurance company. Each group shares risks, but because the members of a group captive are carefully selected, only like-minded members who are carefully managing their claims and risk management are included.
This means that instead of being lumped together with organizations that have frequent claims, you are isolating yourself from the rest of the market. A prospective member with poor loss experience would not be included in the captive.
What Are the Benefits of Joining a Group Captive?
Here are some reasons to consider joining a group captive:
- Premiums based on your loss experience: Premiums can be lower than traditional insurance since they are based on your group's combined loss experience. There's value in partnering with other safety-conscious organizations, but there's also value in not partnering with organizations experiencing frequent claims. When your premiums are dictated by the performance of other companies anyway, why not join a smaller pool full of other organizations with great claims history?
- Potential return on investment: Group captive members often benefit from the investment income generated by premiums held within the captive. This investment income can be returned to member companies as dividends, providing an additional financial incentive beyond just lower premiums. Over time, this can significantly improve the total cost of insurance for participants.
- Improved Safety and Risk Management: All members of the captive have a financial incentive to improve safety protocols and minimize claims. Plus, group captives often require the participation of members in risk management strategies and decision-making processes. This collaborative environment fosters a culture of workplace safety and loss control, which benefits all participants by reducing claims frequency and severity.
- Insulation from market conditions: Group captives provide more stable pricing than traditional insurance markets. Because the captive is wholly owned and controlled by its member companies, it is less susceptible to the cyclical fluctuations and pricing volatility seen in the commercial insurance market. This pricing stability allows member companies to better plan their budgets and manage cash flow.
- Control over policies: every group captive is different, and there are parameters that dictate what lines of insurance and what risks are included. That being said, a captive typically provides greater control over program design and terms and conditions. As a member, you'll have the flexibility to tailor coverage to your specific operational risks.
- Access to specialized coverage: Group captive insurance companies can offer customized coverage options that may not be readily available in the commercial insurance market. This flexibility allows member companies to address unique operational risks, such as workers compensation, general liability, commercial auto, and auto physical damage, tailored to their specific needs.
- Control over claims: in a group captive, you're encouraged to manage claims in a way that will allow premiums to decrease over time, and you are given access to resources that allow you to do so. Group captive members benefit from enhanced claims management services, often partnering with third-party administrators and captive consultants who specialize in claims handling and risk control. This hands-on approach helps to reduce the total cost of claims and improves overall risk outcomes.
- Financial stability and transparency: Because the captive is member-owned, there is greater transparency into financial information, underwriting profits, and the overall performance of the insurance program. Members have a vested interest in the captive’s success and participate in governance, which leads to more prudent financial management and stronger financial stability.
- Collaborative governance and decision-making: Group captive members typically have equal voting rights and participate in the captive’s board of directors. This democratic structure ensures that all participants have a say in key decisions, including underwriting guidelines, reinsurance arrangements, and risk management strategies. This collaborative approach fosters a strong sense of ownership and alignment among participants.
- Lower capital requirements compared to single-parent captives: Joining a group captive generally requires a lower upfront capital investment than forming a single-parent captive. This makes group captives accessible to mid-sized companies and organizations that may not have the scale or resources to create their own captive insurance company.
- Access to expert captive management: To handle day-to-day operations, group captives often contract with experienced captive management companies and consultants. These professionals assist with regulatory compliance, claims handling, actuarial services, and reinsurance placement, ensuring the captive operates efficiently and effectively.
- Enhanced networking opportunities: Being part of a group captive creates opportunities for member companies to network with peers, share best practices, and collaborate on common challenges. Annual meetings, risk workshops, and other events foster a community focused on continuous improvement in risk management and insurance program performance.
Overall, joining a group captive insurance company can offer member companies a unique blend of financial benefits, risk control advantages, and governance participation that can lead to more stable pricing, improved safety, and long-term cost savings.
What Are the Disadvantages of Joining a Group Captive?
Joining a captive requires time and effort, though in our experience, the juice is well worth the squeeze. Don't think of a captive simply as insurance solution, because it's so much more than that – active participation in a captive provides access to risk management resources, networking and benchmarking that you just won't find in the traditional market.
However, here are some of the costs of joining a captive:
- Time: with a long-term commitment such as a captive comes additional investment. There's up front work involved in joining a captive, like compiling your five-year loss history. You may not see an immediate return on your investment (for many of our clients it takes 3-5 years). However, most understand that this time commitment offers so many advantages it's an investment worth making.
- Administration and overhead: even though you aren't purchasing insurance through the traditional market, you still need people to perform the day-to-day functions of the captive. Yet the overall costs still tend to be lower in a captive, due to their streamlined structure and efficiency. And keep in mind these costs exist in the traditional market, too.
- Capitalization: joining a captive will involve collateral, paid to the captive to ensure its ability to pay out claims. The minimum requirement varies based on the domicile (location where it's based), among other factors, and these costs are shared by each member-owner. Capitalization requirements are usually lower in a group captive than a single-parent captive.
Should I Consider Joining a Group Captive?
A group captive is not a fit for everyone: we tend to steer our clients toward the idea when they meet the following criteria:
- Spent more in premium dollars than they spent on claims over the past five years
- Great loss history over the past five years
- Safety-conscious and are committed to minimizing future claims
- Comfortable collaborating with other business leaders and making decisions as a team
- Focused on long-term organizational goals and have healthy financial history
When it comes to group captives, we find the best fit is a mid-market organization who fulfills the above criteria, though there are captives for organizations of all shapes and sizes. It will not be a fit if you experience frequent liability claims.
Am I Ready to Join a Group Captive?
If the advantages seem attractive to you, and you feel you may meet the criteria discussed in this blog, you may be a fit for a member-owned group captive. The next step would be:
- Find the right broker to provide the appropriate guidance and help you make the right connections. We're here to help.
- Gather information with the help of an actuary to review your five-year claims history, relative to your exposure, to calculate your premiums.
- Schedule your captive proposal carefully to give you time to talk to captive members about their experiences and to consider your overall insurance program structure.
At Gregory & Appel, we have extensive experience working with clients as they navigate through this phase of their risk management journey and beyond. We're eager to help, so if you are ready to learn more, fill out the form below.
This content is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. Gregory & Appel is neither a law firm nor a tax advisor; information in all Gregory & Appel materials is meant to be informational and does not constitute legal or tax advice.