As a business owner, you’re constantly searching for innovative and effective ways to safeguard your company’s future while controlling costs. It requires a balance of seeking the best coverage available for the lowest cost in order to be protected from any unnecessary risks.
Depending on the size of your company, you may be paying hundreds of thousands or more than a million dollars a year in insurance premiums. Covering your business for Workers’ Compensation, General Liability, and Business Auto insurance adds up quickly. While insurance coverage is a core component of your risk management practices, as a forward-thinking business owner, you’re likely wondering if there is an alternative to traditional insurance products.
The answer is “yes” and it begins with a group captive insurance program. Group captives, unlike traditional insurance, allow you to partner with other like-minded companies to reduce your insurance premiums while gaining more control of the insurance buying process.
In this guide, we’ll cover everything you need to know about group captive programs, as well as how it can greatly benefit your business’s bottom line. While there are captives designed to fit special insurance needs or to ensure Fortune 1000-sized companies, our focus is on group captive insurance programs to help the middle market businesses in the United States.
Unlike traditional insurance, a group captive insurance company is owned and controlled by its members. Instead of purchasing your Commercial Insurance through a traditional insurance company, you join an existing group of good safe companies in a captive insurance company. This insurance company insures the risks of the businesses of you and the other owners and gives this collective the ability to receive their individual underwriting profits.
A group captive is a way for your business to have direct influence over its insurance program. Group captives allow like-minded, good, safe companies to pool their resources to reduce their insurance overhead and reap the benefits of any unused premiums. This guide is designed to teach you all about group captive insurance programs. You’ll learn the basics of group captive Insurance Programs, the benefits of joining a group captive, whether your business is a good fit for a group captive, and how to go about joining a group captive.
A Group Captive Insurance Company is an insurance company formed by its members for the benefit of its members. Only good, safe companies are invited to join, and current members are often the source of new members. As an owner, you have an influence on how the captive runs and how it grows. Each member company controls one vote on all management decisions. Members can attend two board meetings each year to get a report from their captive manager on the growth and health of the group.
Let’s take a closer look at how group captive insurance companies operate.
Depending on the types of companies within your group, the captive is either “homogeneous” or “heterogeneous.” Homogeneous group captives are comprised of companies from within the same or similar industries. Homogenous captives can take advantage of industry-specific claims and loss control services tailored to the common membership.
Heterogeneous captives are comprised of companies from different industries with low to medium risk profiles. The captive managers ensure there is a good blend of companies from across different industries to maintain a diverse risk pool. While a heterogeneous group does not allow for the use of industry-specific loss control and claims services, there are some significant advantages to having spread of risk by industry. One benefit is it can prevent financial or regulatory issues specific to a single industry from impacting the health of the group as a whole.
With a group captive, you have a direct influence in the management of the captive. Typically, a third-party consulting firm will manage the day-to-day operations of the captive, but you retain a say in the decisions facing the captive. All operational decisions facing the group are made by the group captive’s Board of Directors. The Board is made up of captive members, and each company that joins the captive becomes a member with one vote. All members, regardless of size, represent one vote.
When you join a group captive, you are provided a regular insurance policy from an A+ rated insurance carrier. Additionally, the group benefits financially from sharing some level of risk with the insurance carrier. Through guidance provided by the captive manager, the group determines their level of risk tolerance and agrees to collectively share that layer of risk. Through superior claims management and careful selection of new members, your group captive can expect to run profitably for many years. Reinsurance provides an additional layer of security if any member faces a catastrophic event.
Reinsurance gives the members assurance that claims will still be paid should a very large or several large claims occur in a policy year. Members that cannot control their losses can expect higher premiums in the future and maybe assessed a fixed amount in certain circumstances. However, unlike traditional insurance where premiums can be subject to experience rating or tightening market conditions, the members’ ultimate costs are known when a policy is issued.
A group captive is hard to join but easy to leave. To protect the current membership, prospective members go through a vetting process that includes gathering the data that is required to get a traditional insurance quote in addition to a review of safety policies and financial health. For those willing to proceed through this process, the financial rewards can be significant. We provide more details on the process of joining a group captive in section 06.
While joining a group captive may appear to be more complicated than purchasing traditional insurance, leaving a group captive is easy. All insurance policies are for a term of 1 year. Any member can leave at the end of the policy term, but we seek to educate prospective members before joining so you can make a moral commitment of 3 to 5 years to truly experience the benefits of a group captive program.
Members that do leave the group will have any collateral held until the last policy year is closed, typically 4 to 5 years after expiration. Before joining a group captive, you will want to carefully review the group captive’s documented process for those companies who wish to leave the group. While you need to be aware of the process to exit a group captive, in reality, most companies that join a group captive will remain in the group captive. All businesses in the captive are thoroughly vetted prior to entry to ensure a good fit with the other members, the financial rewards of being in the group captive are significant, and your company has a direct say in management; with benefits like those, it’s hard to leave.
The benefits of group captive insurance are the twin pillars of cost and control. We give you more details here.
The most common reason that companies join a group captive is to capitalize on the lower net insurance premiums they pay. A group captive does not have the same overhead that you pay in the traditional marketplace — the premiums are driven to enhance the insurer’s bottom line, not yours.
Group captives allow you to bring together like-minded and well-run companies to minimize your insurance claims costs. Because the captive controls who enters, you can ensure only safety-oriented, financially stable companies with good claims histories are brought in. In comparison with the traditional insurance pool, you’re now only grouped with other low risk companies. This results in rates trending down over time.
With a traditional insurance company, you have no ability to manage or influence the claims process. The insurance carriers are spending their money and have the right on how to do so. This is not the case in a group captive.
In a group captive, the adjusters are spending your money. The insurance adjusters work for the captive members and not the insurance company. Their goal is to keep the members happy. You have real-time access to information and greater influence in the claims process. Historically, group captives have faster claims closure and lower net cost of claims as a result of the member-driven atmosphere.
The ability to be more involved in the claims process, and the resulting improved loss performance, ensures that premiums will trend downward and allow greater returns to membership.
Often one of the most aggravating parts about insurance is the lack of predictability in pricing each year. There is an arbitrary nature to the quoting process. For little or no explanation, your insurance costs can increase from one year to the next. This inability to predict future costs can impact the bottom line.
In a group captive, your efforts directly influence what you pay in annual premiums. In addition, the group captive members can take steps to premiums, by enhancing members’ safety programs, reducing administrative costs, and streamlining claims investigation and processing. With great predictability and control over your premiums, you can get back to focusing on — and investing in — those things that your company does best.
As a member of the group captive, you have a vote in the decisions of the captive.
You also have an accounting report of all expenses in your insurance program. You know how every penny of your insurance premium is spent. Policy issuance, reinsurance, claims, risk management, and management compensation is disclosed to each member with audited financials provided twice a year. If you have any questions about how the group captive is using its finances, you can access that information.
As a captive member, about 60% of the insurance premiums that you pay are held in your account and will be used to cover your claims. A small portion of your account is set aside for risk-sharing and shifting with other members of the group.
There must be some aspect of risk-sharing in a group captive for the IRS to recognize this as an insurance company. Risk shifting and sharing, while infrequent, protects all members from an adverse impacting a single member. If in any given year, you have funds leftover in your account, those funds are returned, with interest, when the members agree to distribute the funds.
Funds are returned to the members as a dividend, subject to taxation by the IRS. However, funds are returned to the designated recipient which can be a person or entity other than the member company.
While there are numerous benefits to being in a group captive program, you also need to understand the costs to join.
As the owner of an insurance company, you are required to purchase stock in your company. A one-time payment for stock is required by each member. This capital payment varies by group and is an asset to the shareholder. If you exit the captive, this capital payment is returned to the shareholder with any accrued interest upon closeout of your final policy year.
Each member has to put up collateral to cover any unpaid obligation. The collateral can be in the form of cash or letter of credit and is not at risk so long as the member meets their individual financial obligations to the group. The collateral requirement is a function of the premium each year and is collected over the first 3 years of membership and then adjusted with premium changes on renewal. The majority of members choose to fund this with cash and get the added benefit of interest beyond that of traditional bank rates.
While these financial obligations are in addition to what is normally required with traditional insurance programs, each member enjoys benefits that outweigh the additional requirements that are in place for the protection of the entire group.
Certain types of companies are stronger candidates for group captive insurance than others. Businesses that are strong candidates for a group captive have the following characteristics:
BETTER THAN AVERAGE LOSS HISTORY: A captive candidate should have losses that are better than similar businesses in the industry. In assessing your claims history, you need to take into account the last five years. Group captives look favorably on those businesses that, on average, have claims paid that are less than 40% of the total premium year over year.
PREMIUMS THAT EXCEED $150,000: A group captive is for companies that pay a minimum of $150,000 annual in premiums for workers’ compensation, or combined workers' compensation, general liability, and automobile insurance. For companies paying under $150,000 in annual premiums, it won’t make financial sense to enter a group captive.
FINANCIAL STRENGTH: Members should be strong financially. This ensures that all clients can meet their financial obligations. Prospective members and all current members are required to submit financial data for annual review.
FINANCIAL STABILITY: A group captive is designed to help make your company safer over time. All members are expected to be committed to running a safe company and implement any recommendations from risk management.
If a group captive is right for your company, your next step is to find the right group captive to join.
Group captives and group captive managers may vary greatly in structure and operations. Working with the right guide will make the process easy. They can help you determine if an industry-specific group or heterogeneous group is the best option. You can discuss structures, domiciles, and specific member requirements before you join to make sure you are in the right group.
Things to consider when searching for the right group captive to join:
Joining a captive takes a small investment of time to have the opportunity to gain control of your insurance. A prospective member must be prepared to provide:
The review can take 60 to 90 days depending on the needs of the prospective member. We encourage you to start early so you have time to fully understand the group captive concept and evaluate captive pricing.
STEP 1: Your captive professional presents the group captive concept
STEP 2: You meet with the captive management in person or via webinar to get a detailed preview of group captives and how they work.
STEP 3: We collect historical loss, payroll and sales data. Most companies have this information at their fingertips.
STEP 4: Your data is evaluated by your captive professional. It will be clear to you at this point if your company is a fit for a group captive.
STEP 5: The captive manager analyzes the data and provides a preliminary loss pick for your company.
STEP 6: If you accept the pricing model, a final underwriting review is completed and a formal proposal is provided for you to review and analyze. The captive management has financial and legal professionals that can work with your professional consultants to answer any final questions.
STEP 7: Binding coverage begins with remittance of your collateral payment. This starts your coverage and group captive journey.
STEP 8: Unlike traditional insurance, premium payment is set up after your account is bound with the captive manager. Your captive professional will give you options for premium payment that works best for your company.
STEP 9: Within 60 days the captive manager will set up the collateral arrangement that provides the member to member financial guarantee. Your company will be set up in the risk management and claims systems so you can begin to take control of your insurance destiny.
The knowledgeable staff at Leap | Carpenter | Kemps Insurance Agency are dedicated to helping businesses find financial success. We understand each business is unique. Our agents’ priorities are to create a tailored approach to minimizing your company’s risk while minimizing expenses. Let us help you determine if a group captive is right for your business.