Group Captives

Group Captives are widely-used risk management tools which can significantly reduce the costs of risk for good, safer type companies.

So what are they? A Group Captive is defined as an insurance company that provides insurance to and is controlled by its owners.

Members who join Captives seem to like the following 4 benefits:

1. Reduced insurance & operating costs
Collective group pricing and purchase arrangements typically will reduce premium costs to each member company.

2. Lessened pricing volatility
The insurance marketplace commonly goes through different cycles where premium fluctuations have little or no relation to individual loss experience. By pooling your resources in a Group Captive, these swings can be avoided making your
costs more predictable.

3. Earned capital investment income and underwriting profits
If a Company purchases a standard insurance policy, those premiums are lost whether the Company has a good claims year or a bad claims year.  As a shareholder in a Group Captive, the capital (premiums) earns investment income and any unused loss funds are returned as profit distributions.  In many cases, companies have a chance to earn back up to 60% of their premiums. Payments to members are typically deferred for 3-4 years and are payable whether or not the company is still an active member of the Captive.

4. Increased control in managing risk
The Captive has a democratic one member = one vote structure. Each Captive member company is able to participate fully in all decisions regarding claims and risk control.

Detail Highlights:

1. Types of Insurance:  Companies tend to insure Commercial Business Insurance coverages like Workers’ Compensation, General Liability and Auto Liability through Captives. In addition, they can insure Employee Benefits like Group Health and related Wellness Initiatives.

2.  Premiums: The commercial marketplace tends to charge excessive premiums and may not be able to insure harder risks. While there are many benefits in taking part in a Captive, the primary goal is to remove the insurance premiums from
that marketplaceInside the Captive structure, the insurance premiums may be controlled through better underwriting and access to the reinsurance marketplace.  Premiums are different for each member and are typically based on the last 5 years of loss runs.

3. Additional Assessments: Any additional assessments are driven by the member’s loss experience. There is a defined basis for any assessment and when and how they occur. These assessments are limited and maximum amounts are always
shared upfront.

4. Requirements: Typically, Captives require a minimum of $150,000 in combined premiums for the Commercial Business Insurance coverages and a minimum of 75-100 enrolled Employees for Group Health Benefits.

5. Member Commitment: The commitment to a Captive is only for one policy period. However, many Group Captives ask that when a company joins, it makes an unwritten commitment for three to five years, giving the company an opportunity to
learn and understand all of the workings and reap more of the benefits of the Captive.  Members can be also voted out if they continue to pose a higher than acceptable risk to the Captive.

6. Taxation:  Company members are allowed to take a tax deduction for their premiums they remit to the Captive. On the other hand, when the Captive returns its profits back to its members, it is a taxable income event. All Group Captives have
their financial statements audited annually by a CPA firm.

Is there a Financial Risk? No, Not Really

If all a Captive was doing is receiving member premiums into a bank account and hoping losses did not exceed the fund, then…yes it would be very risky. If the program is structured properly through a strong Captive administrator, actuarial firm, and reinsurance company to insure the catastrophic losses, the risk is minimal.  All the member is doing is assuming risk in a smaller predictable loss layer.

The Captive administrator that our firm recommends and uses is Captive Resources, Schaumburg Illinois. To learn more about what a Captive is, please review the front page of their website, as they have a nice, short VIDEO called “Meet Jim Smith”.

For more information contact:

Logan Simios
Managing Director – Benefits Divsion
T 847-818-7540