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What Is Group Captive Insurance?

Jan 11, 2023 Four business people seated at a table, discussing group captives

When well-run organizations face ever-increasing insurance premiums, limited access to coverage or a lack of transparency in their claims management, they may decide it’s time to consider alternative insurance strategies. A captive insurance program may offer just the benefits they seek.

What Is a Captive?

A captive is a licensed insurance company owned, funded, operated and controlled by those it insures.

Organizations that create or become a member of a captive gain the flexibility to tailor the coverage to their specific operational risks.

Types of captives include single parent captives, U.S. branch captives, risk retention groups, cell captives, and group or association captives. To learn more about these alternative risk strategies, read “What Is Captive Insurance?

What Is a Group Captive Insurance Program?

A group captive is an insurance company created specifically to serve the needs of a like-minded group of insureds. For example, a group of small business owners, Latino primary care physicians, or boating enthusiasts could form a group captive.

The group members own the captive insurance company, fund its loss reserves and control its operations to benefit each other. Instead of paying premiums to a commercial insurance carrier, the group captive owners invest in their captive insurance company, essentially putting part of their operating capital at risk. Each member’s premium is based on its own loss experience, meaning it’s a controllable amount.

Together, members of the group captive insurance program make decisions about underwriting, loss control, operations, reinsurance coverage options and even risk management service providers. Because the cost is shared among all group members, operating expenses for group captives are typically lower than those of other captive types.

What Are Homogeneous and Heterogenous Group Captives?

A group captive can be homogeneous or heterogeneous. A homogeneous group captive contains members from the same industry. For example, contractors could form a homogeneous captive. They could tailor coverage to their specific needs and risks. A heterogeneous group captive is composed of members from different industries, diversifying the types of risks across the group. For example, middle-market businesses with a solid commitment to safety and loss control could participate in a group captive, such as Haven Re. Regardless of the group makeup, captive members exhibit strong risk management profiles and share an appetite to control their risk-related finances better.

Are Group Captives Different Than Association Captives?

Group captives sometimes are offered by associations to benefit their member organizations. These special group captives are known as “association captives.” A state association of manufacturers could establish a captive for its members, for example.

To learn more, read “Creating Captive Insurers Can Be an Affordable Solution for Affinity Groups and Associations.”

Is a Group Captive the Right Approach for My Business?

Group captives must be structured properly to meet legal and tax requirements and adhere to the regulations set forth by the domicile in which they are licensed. In other words, they are complex. 

Organizations should consult an expert and consider the group captive insurance pros and cons before moving forward.

What Are the Benefits of a Group Captive?

  • Tailored coverage. Group captive owners can elect coverage aligned specifically with their business realities. This means owners don’t pay extra for inappropriate or unnecessary coverages for their industry, and risks unique to businesses like theirs will be covered. Members may also be able to add coverages that aren’t included in general policies, such as robust coverage for cybercrime.
  • Greater control. Because members own and control their captive insurance company, they determine the rules (within regulatory guidelines). They can set deductibles, maximum payouts and standards for claims.
  • Improved transparency. Group captive owners are aware of its financial performance, so they have a better sense of any coming changes versus those organizations purchasing from the insurance marketplace, who may be surprised at policy renewal time. And, if the group captive’s actuarial guidance and underwriting are sound, members may see reductions rather than increases.
  • Improved worker safety. Group captive members want to keep losses to a minimum, which typically leads to a stronger emphasis on employee safety. In turn, good safety records can bolster employee retention.
  • Potential cost savings. Instead of paying for insurance as a business expense, captive owners essentially put part of their capital at risk in addition to insuring their risk in a captive. In most cases, the cost of insuring risk through a captive is much lower for the long term than purchasing insurance individually.
  • Potential earnings. Traditional insurance premiums are a recurring business expense. Any capital and premiums invested in a captive that aren’t paid out as claims become reserves that can grow through investment earnings.

What Are the Drawbacks of a Group Captive?

  • Potentially more risk. Owners of any captive insurance company, including a group captive, may assume more risk than organizations purchasing fixed-rate insurance through traditional markets. They must set aside enough reserve to pay any claims, which may be more than initially estimated, despite actuary reports and history.
  • Compliance concerns. Group captives are insurance companies and must comply with all associated regulatory requirements.
  • Lack of privacy. Members typically must share financial information that they would generally prefer to keep confidential.
  • Management by consensus. Agreeing on decisions can be difficult if members have different needs and priorities.
  • Time commitment. Group members must commit time and effort to actively managing the captive. Captives do not run on autopilot.
  • Potential conflicts. Some group members may grow faster than others, leading to disagreements about retention and coverage levels.

Working with the Right Group Captive Partner

Creating and administering a captive insurance company require specialized expertise. In addition to the many complexities of regulatory requirements, the basic design of the captive insurance company must be actuarially sound to ensure its viability and compliance with the expectations of the domicile in which it was created. A sound first step for any organization considering forming or becoming part of a group captive is performing a feasibility analysis.

Award-winning Hylant Global Captive Solutions can help organizations conduct a feasibility analysis and explore alternative risk-financing solutions that protect their assets and strengthen their financial performance. To learn more or to speak with a group captive insurance expert, contact Hylant.