Securing the right insurance is an ongoing challenge. Obtaining affordable
insurance can be an even greater test.
The market can get quite complicated so it
is wise to consider all the alternatives. One
option is group captives.
“Group captives provide a means whereby business owners can achieve more control and stability over their insurance program, while lowering their insurance costs
through the return of underwriting profits
and investment income,” says Norman
Henley, director, Captive Services, Arthur
J. Gallagher Risk Management Services
Inc., Houston.
Smart Business talked with Henley for
more of his insight into group captives.
What is a group captive?
A group captive is an insurance company
owned and operated by its members for
the benefit of those members. It is over-seen by a board of directors made up of
elected individuals from the member firms.
They are often based in locations where
there is favorable tax treatment and less
onerous regulation, like Bermuda and the
Cayman Islands. Since the passage of the
1986 Tax Reform Act, domestic captives
have become more popular. Some U.S.
states, such as Vermont, South Carolina
and others, have passed laws adopting captive domicile status to be able to regain
some of the lost premium tax income.
Is there more than one type of group captive?
Essentially, there are two types of member-owned group captives: homogeneous
and heterogeneous. Homogeneous refers
to those groups whose members represent
the same industries. For example, all the
members could be temporary employment
agencies, or they could all be building contractors, trucking contractors or electrical
distributors. Heterogeneous group captives are those whose members come from
diverse industries.
What are the benefits of a group captive?
There are several. One of the benefits is
that premiums are based on the insured’s loss experience rather than trends in the
overall insurance market. A captive provides control of claims through proactive,
third-party claims management. The
insured retains the underwriting profit and
investment income.
As a group captive member, you are an
owner. You control the ‘who, why and
when’ of the insurance process. The financial strength of the group allows the members to choose the highest quality service
providers while limiting the risk of catastrophic losses. This ability to control and
manage these services reduces operating
costs.
In a group captive, premiums paid to a
captive are generally tax deductible
because there is risk sharing. That is unlike
self-insured programs where only the operating expenses are deductible and losses
are not deductible until paid.
What about loss control?
Along with claims management, the business owners control the return on their
investment through the design of detailed
loss prevention strategies.
Captive members take an active part in
the claims process. They do that with protocols that provide for special handling
requirements. They identify ‘hot claims,’
which alert adjustors to claims that require
immediate attention. Many captives also
have access to online claims information
that allows real-time review. Claims management and loss control services are usually provided by third-party administrators.
What coverages are written by a group captive?
Captives were originally used to insure
tough-to-place product liability insurance.
Over the years, they have evolved into a
creative vehicle for providing insurance
covering most types of frequency-driven
insurance including, but not limited to,
workers’ compensation, general liability,
automobile liability, automobile physical
damage and even warranties. Because
many of these have a ‘long tail’ on the
claims payment, the insured has the benefit of investment income.
Should a business owner be concerned with
this alternative approach?
Once an alternative, we believe that captives have now become conventional.
Currently, there are more than 5,000 captives in existence, representing $38 billion
in premiums.
But, entering into a group captive should
not be taken lightly or with only the expectation of immediate savings. It is imperative to seek out and obtain expert advice
on all aspects.
It is important that the determination of
risks are actuarially determined, that the
premiums are set to reflect the retained
exposure and that all operating costs are
determined. All of these costs must be
shared on an equitable basis.
NORMAN HENLEY is director, Captive Services at Arthur J.
Gallagher Risk Management Services Inc. in Houston. Reach him
at (713) 358-5788 or at [email protected].
