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 Norman_Henley@AJG.com.