In part two of our captives blog series, we’ll examine the current market conditions and why a group captive could be the right risk management solution for your business.
Current Market Conditions & High Premiums
We know the insurance market is hardening, meaning rates are increasing and underwriting is becoming more difficult. The hardened market results in smaller coverage limits and higher premiums for businesses. If your company wasn’t prepared for the current market, don’t worry – you’re definitely not alone.
After facing increased premiums year after year, we found that some businesses had outgrown their long-standing policies and were in need of a more consistent, cost-saving solution.
We’re encouraging some of our clients to consider group captives as a solution to the hard markets we’re facing. Although not every organization has the capacity to join a captive, they’re an option you should research if you haven’t already.
Understanding Group Captives
You read previously that a group captive is essentially a group of companies coming together to create their own independent insurance company. They can be an efficient way for middle-market organizations to both assume and transfer some risk.
The way most group captives work is they collect each member’s premiums and then divide them into two “buckets” from which they pay claims. The larger one is for smaller, more frequent claims, while the smaller bucket is reserved for expensive, catastrophic claims.
The standout benefit is that these buckets are usually created based on an actuary’s calculations, using your own claim experience history. This differs from traditional insurance in that insurance companies use generalized rates that are applied to multiple organizations and will fluctuate with market conditions.
Say another group member goes beyond their predicted claims for the year. Your premiums are used for your claims and help if you or another member of your group captive has claims exceeding their budget. There is typically a minimum and a maximum, so you would already be aware of the best- and worst-case scenarios. Then a reinsurer contracts with the group to pay for claims that are beyond the limits of the premium buckets, if necessary.
The best news? If you’ve worked hard to keep your claims low for the first five years of your captive membership, and you continue to do so, your premiums come down. If you continue to decrease your claims year by year, your premiums will follow suit. And what’s even better, in member-owned captives underwriting and investment income are typically returned to members who have good claim experiences, so that as costs are decreasing, underutilized premiums are given back to you!
In a group captive, each member shares risks with the group they have joined. You wouldn’t want to share risk with companies that aren’t properly managing their claims. Partnering with like-minded group members who are proactive about risk management is vital.
We think of captives as a long-haul strategy. They require great planning and preparation, but can eventually pay off in the form of improved claim numbers, a return on premiums and access to invaluable resources, among many other ways.
Or, to view any entry from this six-part series, check out the links below.
- Part 1: Breaking Down the Basics
- Part 2: Learn More About Group Captives
- Part 3: Addressing Common Misconceptions About Captives
- Part 4: Captives as an Employee Benefits Solution
- Part 5: Is a Captive Right For My Business?
- Part 6: Preparing to Join a Captive
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.