You may have heard the term “group captive,” but do you know how a group captive insurance program works? Here’s what you need to know in order to understand how group captives operate and help evaluate if joining one is right for your business.
Evaluation of Group Captive Member Companies
A group captive insurance company is formed by its members for the benefit of its members. A group captive program is a regulated and licensed insurance company made up of member companies, each of which is an owner of the captive.
The group captive can be homogeneous (comprised of companies within the same industry or sector), or heterogeneous (from a variety of industries.
Homogeneous captives can manage claims and losses based on commonalities within the industry. Heterogeneous captives are comprised of companies from different industries, but all must have low-to-medium risk profiles. All member companies, however, must operate safely and be financially stable.
The member companies share some of the group’s risks, which motivates the group to maintain or improve its risk profile through effective risk management strategies.
Prior to acceptance, companies applying for membership in the captive are evaluated by the group to determine:
long-term financial strength and stability
commitment to safety (with solid safety programs in place)
better-than-average loss histories for their industry
annual commercial insurance premiums of $150,000 or more
Management of the Group Captive
Each group captive member company participates in the management of the insurance company. Each company is represented and receives a vote on all management decisions for the company.
A group captive can be managed by the owners, but generally, a captive manager is hired to run the company’s operations, freeing up member companies to focus on managing their own businesses.
Managing a group captive includes day-to-day management of internal processes and procedures, overseeing information management and reporting, cash and financial management, accounting processes – including payment of claims, regulatory compliance, audit and tax preparation, and conducting board and general meetings.
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Premiums, Claims and, Dividends
Similar to a traditional insurance company, the group captive collects premiums, issues policies, and processes and pays claims. The difference is that group captive member companies can share in the company’s profits or dividends – up to 60 percent of the premiums paid in. This is how effective risk management can provide an economic return for captive members.
When a company joins a group captive, it receives a regular insurance policy from an A+ rated carrier. The group agrees upon its level of risk tolerance and to collectively share that level of risk. Additionally, the group benefits from sharing some level of risk with the insurance carrier.
If any member faces a catastrophic event, reinsurance provides an additional layer of security and ensures claims will still be paid. Members with uncontrolled losses will face increased premiums in the future.
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