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Published April 08, 2024

What is Group Captive Insurance?

Three hands pointing at charts on a table

A group captive is an alternative to traditional insurance in which a group of organizations provide coverage for their own risks by forming their own licensed insurance company instead of buying insurance from a third-party.

There are multiple types of group captives, and different captives exist to finance a variety of risks. 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 referring to member-owned group captives, which are owned by the participating member organizations. Another structure, called rented captives, 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.

If you’re feeling lost, take a look at our deep-dive on captives, which explains the overall concept and structure of captives and will explain the variety of different types of captives.

I Have To Pay Someone Else’s Claims?

It is possible that your premium dollars could be used to pay out claims for other member-owners, but understand that this is already happening in the traditional market. When you have a good year in a captive, you could actually experience lower premiums, and members can also receive a return on underwriting profits in the form of dividends.

If you’re tired of your premiums going up year after year with little to no explanation, and you feel like you are controlling your claims without any benefit, a captive may be the right fit for you.

Are Overall Costs Lower in a Captive?

While there is no guarantee that you’ll see a short-term difference, most of our clients experience lower costs after about 3-5 years. In fact, in our experience, it’s very rare for a client who enters a group captive to ever consider leaving. Here are some of the reasons why overall costs tend to be lower in a captive:

  • Premiums are based on your loss experience
  • You partner with other risk-conscious organizations, insulating you from the wider insurance market
  • Many captives offer loss control resources, risk workshops and opportunities for shared learning
  • Some member-owners receive a return on unused loss funds (premium dollars)

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.

What Are the Benefits of Joining a Group Captive?

In addition to the advantages listed above (premiums based on loss experience, improved risk pool, access to risk management resources, return on premiums), here are some reasons to consider joining a group captive:

  • Insulated from market conditions – 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?
  • 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 provides greater control over program design, terms and conditions, and gives member-owners the ability to make decisions together instead of being at the discretion of the insurance company.
  • Control over claims – in a group captive, you are 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.
  • Improved safety & risk management – group captives provide direct access to risk control resources and services.

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. Do not 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.

Captives for Employee Benefits

Group captives also exist to retain risks related to employee benefits. At Gregory & Appel, we have extensive experience – and great results – with clients who have moved medical stop-loss to a group captive. Captives also exist to cover health claims, dental, vision and wellness programs.

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.
  • Information gathering – working with an actuary to review your five-year claims history, relative to your exposure, to calculate your premiums
  • Timing – scheduling your captive proposal as close to 30 days before your existing expiration is ideal, as it will 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, contact us.

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Learn More About Captives

Don’t miss the other entries in this series:

Captives 101: What is Captive Insurance?

Captives vs. Risk Retention Groups: What’s the Difference?

How Do Employee Benefits Captives Work?

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.