“Instead of purchasing their insurance from traditional insurance carriers, some companies are forming a captive insurance company either by themselves or with other companies,” says Bill Selman, a producer for The Graham Company in Philadelphia.
Smart Business talked to Selman about how captive insurance works and who can take advantage of it.
Is captive insurance a new concept?
Captives are not new. In fact, they’ve been around for a long time. There are over 5,000 captive insurance companies in existence today. Fortune 500 companies have independently owned captive insurance companies for decades.
What about group captives?
Group captives are a newer concept. When companies aren’t large enough to own their own captive, many of them partner with other mid-sized companies to form a group captive. Group captives involve anywhere from a handful to over 100 middle-market companies that come together with a set of service providers to provide primarily three types of insurance coverage. They are normally workers’ compensation, general liability and business automobile coverages.
For what kinds of companies would group captives make sense?
Size matters. Premiums should be at least $400,000 for the coverages discussed earlier. The organization should have good safety and loss-control procedures in place, and at least a little bit of an entrepreneurial spirit. These companies have an interest in taking greater control of their insurance program as opposed to simply placing the insurance coverage and forgetting about insurance for the rest of the year. These owners want to actively engage themselves in safety programs, claims programs and hiring practices. They recognize that if their losses are favorable they can take advantage of the profits that are associated with that performance.
What are some of the benefits of captive insurance?
There are three primary benefits of captives: increased control, reduced cost and greater stability.
Captive ownership provides increased control over your destiny. You choose your own partners, select your claims administrator, your re-insurer, etc. You have closer control over how specific things will be managed and you can customize your loss control and safety services to meet your needs.
Second, you can reduce the overall costs of insuring your risks. Your contributions are based on your own expected losses. If you have favorable losses, after approximately four years, you begin to take the underlying profit and the interest income as a dividend.
Third, as a group of insureds you are generally able to negotiate broad coverage terms and stable pricing despite the inevitable swings of the marketplace.
Are there disadvantages?
Yes, at least perceived disadvantages. One, if you’re not committed and do not have a good loss performance, your costs could be higher than they would be had you simply bought a traditional guaranteed cost insurance program. Companies that aren’t able to adequately control losses over the long term will suffer.
It’s really only suited for companies that want to get involved with owning an insurance company. It’s not a dramatic additional amount of time spent, but there are typically two board meetings a year and some new loss control efforts. And on some level you do have an exposure to other member’s losses. There is some shifting and sharing of losses among members, although it should be structured in a way to minimize that exposure.
Are all captives the same?
No each captive is a least a little bit different. Before moving ahead, it’s very important to thoroughly analyze a potential captive solution to be sure that you understand its structure and the character of the other members. It is also important that all members be big enough to pay their own major claims without creating loss sharing after a single ‘shock loss.’ If you are in a captive with 50 or 100 other companies, you will not achieve your objective of being a real ‘owner.’
BILL SELMAN is a producer for The Graham Company. Reach him at (215) 701-5233 or email@example.com.