When a company feels it has no control over its continually rising insurance premiums or that its good risk record isn’t being rewarded, but it isn’t ready to risk or cannot afford becoming wholly self-insured, what can it do? If it faces unique risks that commercial carriers aren’t willing to insure or will insure only at prohibitively high costs, what then? For some companies, a group insurance captive might be the answer.
How a Group Captive Works
A group captive is an insurance company formed to underwrite specific risks of its members. The captive may be homogeneous, meaning it is comprised of companies within the same industry. Or it may be heterogeneous, meaning it is comprised of companies within different industries, but members likely are of the same relative size or share a common risk financing need that the commercial market doesn’t readily or efficiently address.
Group captives are exclusive. This is because members share the risks as well as the rewards. For a captive to be successful, its members must demonstrate:
- A strong safety and risk-management culture
- A stable balance sheet
- Better-than-average claims experience relative to peers
A well-designed, well-managed group captive provides many benefits to its members. Some of these may include:
- Reduced costs. While members still pay premiums, pricing is based on superior risk performance (fewer and smaller claims) and is generally lower than that found in the commercial market. In addition, these premiums do not include costs for overhead and profit margins that traditional insurance companies must build in to their pricing structure.
- Direct access. With direct access to reinsurance markets, members benefit from wholesale pricing.
- Improved stability. Whereas commercial insurance premiums are affected by a wide pool of risks and parties being insured, group captives focus only on the risks its carefully vetted members need insured.
- Enhanced income. A group captive can capture underwriting profits and investment income for its members. Money saved and earned can be channeled back into the members’ businesses to fund growth and competitive advantage.
- Lower taxes. Dollars paid into the captive as premiums and paid out as losses are not generally taxed.
- More control. As owners and not just premium payers, group captive members have a say in how the captive is run, who can join and when, how investments are made, and how claims are handled.
The benefits are enticing. Even so, group captives aren’t right for every business.
Evaluating Risk Alternatives
Just as with other types of alternative risk financing, captive structures are complex. Before deciding whether forming or joining one is the best risk financing solution, work with an experienced partner to conduct a feasibility study as well as to explore other options. At Hylant, we begin by helping clients:
- Explore and raise awareness of the organization’s strategic, financial, human capital and operational risks
- Quantify the potential financial impacts of those risks
- Prioritize risks into potential coverage categories (assume, mitigate, prevent, finance)
- Study the organization’s risk appetite and comfort level
- Consider the cost/benefit and risk profile resulting from the potential formation of a captive insurance company or the joining of an existing group captive, as well as other options
Contact your local Hylant group captive risk expert to learn more about captives and whether a group captive is right for your business.
The above information does not constitute advice. Always contact your insurance broker or trusted adviser for insurance-related questions.