As socioeconomic changes have evolved, the commercial insurance market has changed with it by default. To a large extent, when businesses need insurance, they go to an insurance broker or agent to purchase it. For the most part, transferring risk in that way has traditionally worked well.
Yet, it does not work as well under two distinct circumstances – when the cost of insurance is prohibitive and when the necessary coverage is impossible to acquire. Group captive insurance was born out of the need for businesses to find ways to save money without cutting corners on the insurance coverage they need to protect them, all while exercising some control over loss ratios.
The Basics of Group Captive Insurance
Group captive insurance is defined as an insurance company owned by the insureds, which insures the risks of the members in the group. The insureds in the group may be related or unrelated to each other.
The purpose of a group captive insurance company is to pay for losses in the group while giving owners of the company more control over the group’s risks and losses.
You might think of it as a form of self-insurance for either one company or a select group of companies. Group captive insurance works well for companies that are committed to reducing losses which, in turn, benefits all businesses within the group.
When hard times hit, you cannot always change what you are doing, but you can change how you respond. That is exactly what happened during the 1980s, when insurance companies were taking in losses at a heavy clip.
Much to the demise of business owners, insurance companies responded by increasing premiums and tightening up underwriting qualifications. As a result, several types of insurance coverages were no longer available at any price. When companies could get coverage, they often could not afford it.
This phenomenon led to reforms in the insurance industry, as businesses sought alternatives to traditional insurance channels. Business owners strategized to make legal changes to create group captive insurance companies. They ultimately had success with their initiatives.
As group captive insurance companies started to take shape, they introduced more capital and competition into the market, which has been good for both the insurance industry and businesses alike. Alternatives to traditional insurance companies such as risk retention groups, catastrophe bonds, sidecars, collateralized reinsurance, and large deductible plans now make up 25% to 35% of the commercial insurance market in the United States. In fact, such programs are barely even recognized as alternatives.
Why Group Captive Insurance Is Popular among Businesses
As the benefits of group captive insurance companies have started to catch on, they are quickly gaining in numbers.
To look back, a few select group captives have launched in the construction industry over the last 30 years or so. The pandemic, which disrupted nearly every industry, has compounded the uncertainties of the nation and challenges of the hard market. In addition to the ordinary challenges of operating a business, business owners scrambled to file claims for business interruptions, liabilities, and other stumbling blocks, only to be met with a denial of claims, additional exclusions, and premium hikes. Businesses are seeing group captives as a way to overcome challenges, new and old.
Just how popular is captive insurance?
The International Risk Management Institute (IRMI) states businesses are looking for new alternatives such as group captives to help companies meet their needs at scale. Since 2021, there were 5,985 group captives in the United States. A Marsh report states captive insurance companies almost doubled in 2020. The state of Vermont leads the country with 620 group captives as of 2021.
The American Bar Association reports group captives are increasing in popularity in architectural and engineering firms. Some group captives have outpaced traditional insurance companies so well, they have transitioned to admitted insurance companies and started offering primary coverage in place of the group captive model. Captive International notes group captives have erupted and now account for $60 billion in gross premiums, which is an increase of $6 billion from 2020 to 2021.
Overall, group captives are just a better option in today’s evolving landscape.
Tenuous times call for creative solutions, and that is exactly how group captive insurance came into being. That is also why they are gaining in popularity.
Group captive insurance does not replace all commercial policies, however, and probably never will. Nonetheless, under certain circumstances, captive insurance makes a lot of sense.
To learn more about the benefits of group captive insurance, contact the experts at Leap Carpenter Kemps Insurance Agency. You may discover that group captive insurance is the perfect solution for your insurance needs. Call for a free quote today!
My insurance career spans more than two decades and includes extensive work in group captives and construction, working with general contractors and subcontractors all over the State.
Need more Specific Advice?
Tell us about your exposures, and we'll write an article about how we would mitigate your risk.
Leap | Carpenter | Kemps Insurance Agency provides Commercial Business Insurance, Employee Benefits, Life and Health Insurance, and Personal Insurance to all of California, including Merced, Atwater, Los Banos, Mariposa, Madera, Fresno, Modesto, Turlock, and Stockton.
CA License Number 0646081 | Licensed to do business in California, Arizona, Hawaii, Idaho, Montana, Nevada, North Carolina, Oklahoma, Oregon, Virginia, West Virginia and Washington.