Reduce your insurance spend with a group captive

Although group captives have been around for a long time, there’s additional awareness today as business owners and risk managers focus on gaining further advantages over their competitors, says Lori Armstrong, CPCU, ARM, area vice president at Arthur J. Gallagher & Co.

Group captives allow a business owner to reap financial rewards beyond those that are available in the traditional insurance marketplace. Underwriting profits that normally are retained by an insurance carrier are returned to the captive owners.

Smart Business spoke with Armstrong about how group captives work and when they make sense as an alternative risk strategy.

What types of group captives are available and what risks do they typically insure?

Group captives can be heterogeneous or homogeneous. Homogenous programs allow like-minded companies in similar industries to come together to reduce their insurance premiums. Heterogeneous programs can be an excellent way to reduce costs and spread risk over different classes of businesses that are best in class and committed to safety.

Captives typically insure a portion of the casualty coverage for workers’ compensation, general liability and automobile. Catastrophic exposures are still transferred to a traditional insurer.

What are the benefits of joining captives?

A group captive considers a member’s — or potential member’s — historical loss experience to develop a premium, versus charging rates based on industrywide loss experience. Therefore, captives offer performance-driven pricing. When is the last time an insurer returned automobile or liability premiums to you based upon your loss experience? If you are effective at controlling claims, your net costs in a captive will be lower than most in your industry. Additionally, your premiums over the long term (three to five years) are less subject to insurance market fluctuations.

In addition to lower costs, captives allow members to take control of decisions that are typically dictated by insurance companies: coverage terms, deductible levels, claims service providers and safety initiatives, to name a few. It also can be a way to purchase coverage that’s unaffordable or not available in the standard marketplace. Finally, captives provide a forum for business leaders to exchange ideas and share best practices.

Are group captives more work?

No. The captive hires a captive manager to handle the day-to-day operation of the captive. Members send a representative (usually the owner or CFO) to attend the board meetings — typically two per year. Those members elected to serve on the executive board may have some additional time spent in those roles. This time commitment is typically less than the time CEOs and CFOs spend securing insurance in the traditional insurance market each year.

Which companies are best suited for these?

As a rule of thumb, companies that: (1) spend a combined total of $300,000 per year in workers’ compensation, general liability and automobile insurance premiums; (2) that want more control over these costs; and (3) are committed to continuously improving their safety culture.

What do business owners need to consider when joining a group captive?

Not all captives are created equal. You will want to be comfortable with the make up and size of the group. Captives can be similar in size of premium, revenues or numbers of employees.

It’s important to examine the retention levels, which is the amount you pay before reinsurance kicks in.

Take time to review the historical performance of the captive. How much risk sharing exists among the members, and does that amount match your risk tolerance? Have there been any assessments made to members? Also, evaluate and understand the policyholder returns — the underwriting profits returned from the captive — to gain a sense of the pricing adequacy.

Group captives are a useful tool for many companies who want more control and consistency with their insurance, especially if they have better than average loss ratios and a high commitment to safety. If this sounds like you, talk to an experienced captive management company and request a feasibility study.

Insights Insurance/Risk Management is brought to you by Arthur J. Gallagher & Co.