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Published August 08, 2023

Captives Part 6: Preparing to Join a Captive

A group of business leaders gather around a table with paper and computers

In part six of our captives blog series, we walk through the steps you will take before forming or joining a captive and help you steer away from common pitfalls.

We realize the decision to join a captive isn’t made overnight. Creating or joining a captive requires extensive discussion and preparation from your leadership team – but this effort won’t be in vain. Improving an organization’s overall safety is a common byproduct of entering a captive as most require every member to have their own safety committee. Also, since it’s their own money at stake, companies typically nominate someone internally to be their dedicated safety contact in addition to other roles.

Getting Your Leadership on Board

It’s critical that your leadership team understands how safety affects your bottom line and how captives can play a major role in saving you money for years to come.

Sound safety practices and claims management both protect the wellbeing of your employees and are good for your business. Research and industry experience suggest businesses that invest in health and safety programs realize a tangible return. These returns stem from:

Decreased Lost Time

Safety programs can reduce worker injuries and incidents, allowing companies to decrease expenses related to medical care, PTO, litigation and disaster mitigation.

Compliance With Regulation, Laws & Standards

Non-compliance can be disastrous, impacting an organization financially and damaging their reputation. Avoiding legal fees and fines from OSHA or other regulatory agencies help maintain a healthy bottom line.

Increased Operational Efficiency

A focus on safety leads to higher productivity, which drives short-term revenue growth and supports long-term sustainability.

Improved Employee Satisfaction

Recruiting and retaining top talent is easier for organizations that provide safe and comfortable workplaces, care for employee wellbeing and take steps to protect the environment.

Positive Reputation

Employers want their employees, customers and the public to view them as safety-focused.

Between webinars, workshops and an experienced broker at your fingertips, you’ll have all the resources available to help you reduce your overall risk and lower your audit factor, which in turn will help lower your premiums. You’ll work together with your broker to establish and regulate procedures that not only save you money in the long run but – more importantly – keep your employees safe.

But for now, we wanted to arm you with enough information to educate your team and begin having these preliminary discussions. You can always reach out to an experienced risk advisor if you have specific questions or just want more information.

Finding the Right Broker

Now, this may be the most important step. If you are seriously considering the captive option, it’s essential that you join the right captive with the right broker for the right reasons.

The right broker should have enough experience to be able to guide you through the process and answer all of your questions and be able to make the right connections. You also don’t want someone who will set you up with a group and then send you on your way. You want a broker who will be there for you – every step of the way.

Between the initial interviews, regular board meetings and risk control workshops, you’re going to have questions – it’s inevitable. If your broker isn’t attending those events, then they will not have the knowledge to answer those questions.

Ultimately, you need to find a broker who has the experience and is willing (and able) to join you on your journey.

To help you navigate these conversations, we’ve compiled the following list of questions to ask your potential broker:

  • How long have you been working with captives?
  • How many clients do you have in a captive?
  • How many different captive groups do you work with?
  • Are you willing and able to attend captive-related events such as board meetings?
  • How will you identify which captive is right for my business?

Their answers should help you determine their credibility and whether or not they’d be a good fit for your organization.

How to Identify an Inexperienced Broker

Unfortunately, some brokers will try to talk to you out of a captive simply because they’re not familiar with them and don’t want to lose your business. We hear this all the time from leaders who have inherited insurance partnerships based off old relationships.

Captives are a complex, alternative risk strategy and you are going to want an experienced broker to help guide you through the process. Metaphorically speaking, it’s like letting your primary care physician perform brain surgery on you.

That’s why we’ve compiled a list of phrases our clients have heard to help you identify INEXPERIENCED or MISGUIDED advisors:

  • Your claim experience isn’t good enough.
  • You’ll pay more because of other people’s claims.
  • Your broker can’t provide numbers to validate a historical return/dividend.
  • You don’t pay enough premium.
  • You’re too big for a captive.
  • That big claim is going to increase your captive cost.
  • All captives are an 831(b).

If you’re ever given one of these examples as a reason not to join a captive, don’t hesitate to get a second opinion.

The Process of Joining a Group Captive

If you have ever received competitive proposals on your insurance program, you have already been through 85% of the work required to get a captive proposal. You will find the process is very similar – a captive group is just going to look a little closer and ask more questions than a traditional insurance company.

Information Gathering

We talked about an actuary being involved and that’s actually a good thing for you as long as your organization has controlled its claims over the last five years. The actuary will look at your claims relative to your exposure (payroll, sales, number of vehicles) to calculate your premiums. Their job is simply to make sure the group will have enough dollars in the buckets to pay for every member’s claims.

There are no market forces at work here, so the “debit & credit” work that traditional underwriters do, based on the market and their individual profitability, goes away. That’s why the information gathering may be more detailed during this stage.

You can also expect some questions about your organization’s finances. Most captives will have an independent consultant review your company’s audited financials. Since the captive is taking a risk with each new member, the established members want to make sure that every company they admit will be able to pay their premiums and weather the group’s financial requirements.

Rest assured that your financial information is not shared with anyone beyond the consultant performing the review. Captive groups take the protection of this information very seriously!

You should also prepare for questions about your risk control efforts. Most groups have their own list of questions they ask all prospective members based on what is important to that captive. For example, if you are looking to enter a trucking captive, you can bet that they are going to ask you about driver qualifications!

Timing

The last thing you want to do is to go through all the work of learning about a captive, gathering data for a proposal and then not have enough time to thoughtfully consider joining.

A broker who is well-versed in this process will tell you to schedule your captive proposal as close to 30 days before your insurance expiration date as possible. They’ll do this for a few reasons:

You’re not buying traditional insurance. You’re joining a captive, which is a long-term proposition. Any serious commitment requires more time for consideration.

You need time to talk to other captive members about their experiences. And if the timing is right, you may want to attend one of their meetings so you can talk to other members face-to-face.

You may want to have your business advisors review the group. You’ll need to give your accountants, attorneys, etc. ample time to research and share their opinions.

You need to consider your overall insurance program structure. If you join a captive, you might be leaving a “package” you have with your traditional insurance carrier. Even an experienced broker will need a few weeks to restructure your program and build out the remaining coverage around the captive.

It will get you in the habit of not renewing your insurance at the last minute. If you join a captive, those days are over! You will receive your renewal costs around a month before the expiration date of your current program, so you’ll be able to experience what it’s like to have time to make a decision.

Advice for People Considering Captives

Don’t wait! Almost every time one of our clients gets into a captive, they tell us they wish they would have done it sooner because the captive’s structure actually makes them a better company from a lot of perspectives – not just from an insurance standpoint.

Think about it. If you’re with a group of like-minded peers and everybody’s trying to get better, you’re sharing all of these ideas and best practices that can help transform you into a better company. And that’s just one of many examples of how captives can help elevate your business.

So certainly, you should consider it. Start researching. Talk to someone who’s qualified. Start having those internal discussions with your leadership team. A captive might not be as far-fetched as you originally imagined.

Look for full disclosure and transparency when examining captives as an option for your organization.


That’s it for our series on captives. To view any of the previous entries, 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.