Member-owned group captives save good companies good money — they pay less on premiums, build more assets, and enjoy greater control over claims management. Watch our video and read through the below guide to see the benefits that business owners receive from member-owned group captive programs. If you’d like to learn more or to see if your company qualifies, contact us today.
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Chapter
01
The many benefits of captives are now accessible to middle market firms.
Introduction to the Guide
Captive insurance takes “better” businesses out of the standard market and groups them together into their own insurance company.
Group Captive Basics
02
The combination of shrinking premiums and the return of unused premiums means the overall cost to insure a business is dramatically less than with traditional insurance products.
Group Captive Benefits
03
There are a variety of types of captives developed to deliver specific benefits to specific business types.
Types of Captives
04
It is relative easy to self-diagnose whether a business will be a good fit for group captive insurance.
Ideal Group Captive Member Businesses
05
A group captive program is a different method of purchasing insurance; one that also establishes a separate mechanism for growing and preserving financial assets outside of your existing business.
Process to Join a Group Captive
06
Explore Group Captive Guide
Chapter 01
A captive insurance company is an entity formed specifically to manage the risks of its parent company. These “single parent captives” have long been used by Fortune 500 companies to manage their diverse risk portfolios. With the development of several captive company variations, the many benefits of captives are now accessible to middle market firms. This guide explains the mechanics and benefits of one of the fastest growing types of captives: Member-Owned Group Captive Insurance. As its name suggests, group captives bring together a group of businesses to form an insurance company that manages only their risks. This guide will assist business owners in determining if their business is a good fit for this approach to risk management.
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In simple terms, a group captive insurance company is an insurance company formed to insure only the risks of its member businesses. This creates a beneficial structure for certain businesses. Here’s how. The standard insurance market is based on the law of averages. Better run businesses with fewer claims subsidize those with more claims. Captive insurance takes those “better” businesses out of the standard market and groups them together into their own insurance company. Since collectively these businesses have fewer claims, their premiums end up much lower than they were in the traditional market. Read more about lower premiums and return of unused premiums: Captive Benefits. Here are some additional details: CAPTIVE MANAGEMENT The group captive insurance company is managed by a captive management firm like Captive Resources, a Chicago based firm that has formed and manages over 30 group captives. About 40% of captive members’ premiums are used to cover the basic costs of running their insurance company, including claims management, loss control, policy issuance, and reinsurance. CAPTIVE BOARD OF DIRECTORS All major decisions about the captive management are made by the captive board of directors which is made up exclusively of members of the captive. Each business that joins the captive becomes a captive member with one vote, regardless of their size, ensuring that decisions are made in the best interest of all members. RISK SHARING AND REINSURANCE The captive structure requires a small amount of risk sharing between members, typically less than 10%. The captive company covers all members’ claims up to a predetermined limit, typically $350,000 to $500,000. The captive contracts with a standard insurance carrier like AIG, Chubb, or Hartford to cover claims in excess of the set limit. This is considered reinsurance. Claims over the limit are covered by the reinsurance company. This structure protects the captive members from catastrophic claims. TRADITIONAL INSURANCE POLICY The captive’s reinsurance provider issues insurance policies that appear exactly like any other standard insurance policy. No outside entity is able to identify that you are insured through a captive. JOINING AND LEAVING A CAPTIVE Joining a group captive is more complicated than purchasing traditional insurance coverage because, as previously explained, members become owners of the captive company. Fortunately, for businesses that fit the ideal captive profile the rewards are significant. Nearly all companies accumulate hundreds of thousands of dollars in their asset account in just a few years. The process to join a captive is outlined in chapter six. As with joining, leaving a group captive is also more complicated. It is recommended that businesses join a captive intending to stay a minimum of five years, as it typically takes that long for dividends distribution to begin. In reality, few businesses ever chose to leave a group captive. Since only businesses that have been pre-qualified to be the right fit are accepted in to the captive, virtually every business that joins reaps significant benefits, and therefore has no reason to exit.
CAPTIVE MANAGEMENT The group captive insurance company is managed by a captive management firm like Captive Resources, a Chicago based firm that has formed and manages over 30 group captives. About 40% of captive members’ premiums are used to cover the basic costs of running their insurance company, including claims management, loss control, policy issuance, and reinsurance. CAPTIVE BOARD OF DIRECTORS All major decisions about the captive management are made by the captive board of directors which is made up exclusively of members of the captive. Each business that joins the captive becomes a captive member with one vote, regardless of their size, ensuring that decisions are made in the best interest of all members. RISK SHARING AND REINSURANCE The captive structure requires a small amount of risk sharing between members, typically less than 10%. The captive company covers all members’ claims up to a predetermined limit, typically $350,000 to $500,000. The captive contracts with a standard insurance carrier like AIG, Chubb, or Hartford to cover claims in excess of the set limit. This is considered reinsurance. Claims over the limit are covered by the reinsurance company. This structure protects the captive members from catastrophic claims. TRADITIONAL INSURANCE POLICY The captive’s reinsurance provider issues insurance policies that appear exactly like any other standard insurance policy. No outside entity is able to identify that you are insured through a captive. JOINING AND LEAVING A CAPTIVE Joining a group captive is more complicated than purchasing traditional insurance coverage because, as previously explained, members become owners of the captive company. Fortunately, for businesses that fit the ideal captive profile the rewards are significant. Nearly all companies accumulate hundreds of thousands of dollars in their asset account in just a few years. The process to join a captive is outlined in chapter six. As with joining, leaving a group captive is also more complicated. It is recommended that businesses join a captive intending to stay a minimum of five years, as it typically takes that long for dividends distribution to begin. In reality, few businesses ever chose to leave a group captive. Since only businesses that have been pre-qualified to be the right fit are accepted in to the captive, virtually every business that joins reaps significant benefits, and therefore has no reason to exit.
LOWER PREMIUMS OVER TIME Group captive insurance brings together the best run businesses to form an insurance company that exclusively manages the risks of its owners. Since only businesses that are well-run and safety-focused qualify to join the group captive, the collective risk is much lower than in the general insurance pool. As member businesses are established in the captive, their premiums go down. Over time most members experience very significant premium reductions. Additionally, premiums for each member business are determined by actuaries based solely on their individual claims history, not by industry averages or insurance company calculations. Again, members of the group captive have better claims histories than their industry pools, therefore premiums based solely on their history results in lower costs. And because businesses in a captive tend to improve their claims performance year after year, the compounding of low claims years can produce rates that are dramatically lower than the industry average. RETURN OF UNUSED PREMIUMS About 60% of each captive members’ premiums are isolated in their own asset account which is used to cover claims. Each year that the claims fund is not depleted, the remaining funds are reserved and invested. After three to five years in the asset account, the funds—both unused premiums and any investment income earned—can be returned to the business owner through a dividends payment. While the captive board determines the amount of dividends and when they will be paid, all accumulated funds in an individual asset account are eventually returned to the business owner. The combination of shrinking premiums and the return of unused premiums means the overall cost to insure a business is dramatically less than with traditional insurance products. GREATER CONTROL OVER COSTS In the traditional insurance market, a business has little direct control over the annual cost of their insurance. The opposite is the case in a group captive insurance program where a business’ effort to reduce claims directly results in lower insurance premiums. Therefore, keeping claims to a minimum is the focus in a group captive. For maximum benefit, businesses enhance safety programs, streamline claims management, strengthen claims investigations, and raise focus on corporate culture. Each of these is proven to lower claims, which lowers premiums. PREDICTABILITY / IMPROVED BUDGETING Business owners understand that being able to predict annual expenses allows for more accurate budgeting and reduces the need for financial reserves to cover unanticipated expenses. Historically, annual insurance premiums have been one of the line items that are very difficult to project as insurance carriers have often raised rates dramatically year over year with no explanation. In a group captive, each year actuaries determine premiums and outline each member’s best and worst case scenario. There are never any surprises. And group captive insurance stabilizes the annual renewal process. Since premiums are directly based on the previous year’s claims record, captive members know with near certainty what their premiums will cost each year. TRANSPARENCY Since each member business is an owner of the captive insurance company, there is complete transparency. Every owner knows how every dollar of their premiums are being used and how every other members’ premiums are used as well. All members have access to all company financial information. They can see how much is spent to pay claims, issue policies, provide claims management and loss control services, secure reinsurance, as well as cover general O&M and broker commissions. GREATER CONTROL OVER CLAIMS MANAGEMENT Captive insurance provides member businesses much greater control over their claims management. If a captive member is concerned about the legitimacy of a claim, they can call for an investigation. Conversely, if they would like it closed and settled quickly, that is what occurs. With advice from the Captive Management Company, the member’s attorney and insurance broker, the captive member makes these decisions in their best interest.
LOWER PREMIUMS OVER TIME Group captive insurance brings together the best run businesses to form an insurance company that exclusively manages the risks of its owners. Since only businesses that are well-run and safety-focused qualify to join the group captive, the collective risk is much lower than in the general insurance pool. As member businesses are established in the captive, their premiums go down. Over time most members experience very significant premium reductions. Additionally, premiums for each member business are determined by actuaries based solely on their individual claims history, not by industry averages or insurance company calculations. Again, members of the group captive have better claims histories than their industry pools, therefore premiums based solely on their history results in lower costs. And because businesses in a captive tend to improve their claims
To better grasp the benefits of group captive insurance, it is important to understand that there are a variety of types of captives developed to deliver specific benefits to specific business types. SINGLE PARENT An insurance captive created to manage the risks of one business. These are sometimes referred to as “pure captives”. The insured business is responsible for all the captive management and maintenance. Significant financial resources are required to establish a single parent captive. RENT-A-CAPTIVE A rent-a-captive is created by a firm that puts up the capital to establish the captive company and then “rents out” space in the captive for a fee. This can be a good option for a business with a good safety record that lacks the resources to establish a single parent captive or to qualify for a group captive. SELF-INSURED GROUPS VS. GROUP CAPTIVES While not a type of captive insurance, this insurance vehicle is often confused with group captive insurance, even by insurance professionals. With a self-insured group, members enter into a joint and several liability contract which deems all participating members equally responsible for all claims. And when a group member goes out of business, the remaining members continue to be responsible for any unpaid claims. This greatly increases the potential liability of all members.
Ideal Group Captive Member Buinesses
SELF-INSURED GROUPS VS. GROUP CAPTIVES While not a type of captive insurance, this insurance vehicle is often confused with group captive insurance, even by insurance professionals. With a self-insured group, members enter into a joint and several liability contract which deems all participating members equally responsible for all claims. And when a group member goes out of business, the remaining members continue to be responsible for any unpaid claims. This greatly increases the potential liability of all members.
Ideal Group Captive Memeber Businesses
The ideal group captive member business will be a privately held mid-market company with predictable risks, a strong focus on employee safety, and a great corporate culture. It is relative easy to self-diagnose whether a business will be a good fit for group captive insurance. First, the business needs to pay a minimum of $100,000 annually in workers’ compensation, general liability, and auto insurance premiums combined. At this level, group captive insurance begins to make sense. Next, the business needs to review their last five years of claims history. A business would likely be a good fit if on average claims paid equal less than 40% of the total premium paid. Finally, it is important for the business to be financially strong. Every member needs to be able to meet their claims obligation. To ensure this, each member business puts up collateral to cover the first few years until their asset account has accumulated to a sufficient level. There are additional nuances that help determine how much a business will benefit from joining a group captive. A broker with experience in group captive insurance programs will do a more complete evaluation once a business is identified as a likely candidate.
obligation. To ensure this, each member business puts up collateral to cover the first few years until their asset account has accumulated to a sufficient level. There are additional nuances that help determine how much a business will benefit from joining a group captive. A broker with experience in group captive insurance programs will do a more complete evaluation once a business is identified as a likely candidate.
When considering a move to a group captive insurance program, the decision-making process is much different than when renewing your business insurance in the traditional market where price and service level are generally the driving factors. This is because a group captive program is a different method of purchasing insurance; one that also establishes a separate mechanism for growing and preserving financial assets outside of your existing business. In addition to looking at the premium and claims payment history of a business, the captive manager will look at a number of other operational factors including:
The full analysis and qualification process can take two to six months. For this reason, it is not recommended that the evaluation of a group captive program be conducted in conjunction with a business’ regular annual insurance renewal. When determining the value and projected annual premium with a group captive program, it is important to understand that conventional bidding and negotiation of rates is not part of the process. The insurance carriers don’t use the rates filed with regulatory agencies but rather establish premiums developed by the actuarial “loss pick”. These determinations use five years of claims and premium data to determine the premium amount and claims fund deposit needed to protect the other members of the captive. These actuarial forecasts tend to be conservative (more expensive) in the early years of captive membership because, as most business owners are aware, insurance companies have differing claims reserves and payment practices. As a business ages in a captive program the claims experience becomes more predictable because the claims reserving and payment strategy is set by the captive owners. This results in more significant cost savings and asset growth over time. The process of joining a captive will take between three weeks to two months depending on the complexity of the business considering the option and the workload of the captive management company. CAPTIVE ENROLLMENT PROCESS:
Length of ownership
Financial strength
Business Standard Industry Classification (SIC code)
