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Published August 08, 2023

Captives Part 1: Breaking Down the Basics

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In part one of our captives blog series, we’ll define captives, explore why you might join one and examine the different types of captives.

At Gregory & Appel, it’s our job to find the best risk transfer program for our clients – and for many, the traditional market is the right fit. But for companies looking to have more control over their insurance costs, alternative models may be available.

What Are Captives?

Think about how you buy traditional insurance. You pay the insurance company a premium and regardless of your own loss activity those premiums often fluctuate year-to-year, depending on the state of the market. Many companies and executives are becoming increasingly frustrated with a lack of control over what influences the price of their premiums and what, if anything, they can do about it.

Think of a captive as a group of companies coming together to create their own independent insurance company. Instead of choosing to buy insurance from a third party, this group pays into a fund that consists of contributions from every member. If there are leftover funds after every organization’s claims have been paid out, each member would then get a share back. This benefit is one of the main reasons some companies are choosing to leave the traditional market.

Why Captives?

Consider this: If you own the insurance company (like you would in a captive), you’re actually paying yourself that premium. The money that the insurance company makes usually comes from both underwriting profits (when your premiums outweigh your claims) and investment income (when they’re taking your money and investing it over time).

In a captive scenario, your company is getting both the underwriting and investment income. And not only could you see more dollars come back to you, but you also have a say in how your premiums are set. As a captive owner, you would have control over your insurance company and would not be subject to wild fluctuations in the marketplace.

Are All Captives the Same?

There are many different kinds of captives, so we’ll break each one down for you below.

Single-Parent Captives (aka Pure Captives)

Owned entirely by one organization, they provide insurance exclusively to that owner.

Segregated-Cell Captives

May have more than one owner and they provide insurance to the owners of each cell.

Group Captives

Made up of multiple organizations (either similar or dissimilar in size or industry) who band together to buy insurance as a group. This is the solution we recommend to most of our clients and what we will focus on throughout this blog series.

Did You Know?

Captives can also be a creative solution for your employee benefits plan! And with the average time for returns in a group medical captive being 18 months, it’s an option you’ll definitely want to explore. You can read more about captives for employee benefits in part four of this series.

We’re firm believers in transparency, so we acknowledge that captives aren’t a magic solution and they aren’t a good fit for every company. There are calculated risks involved that should be fully explored prior to entering this type of strategy. And that’s why we’re here – to take the mystery out of alternative risk.

Click here to continue reading in part two, “Learning More About Group Captives.”

Or, to view any entry from this six-part series, check out the links 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.