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There is at least one effect of a business environment characterised by uncertainty and volatility that can always be counted on: that is the initiative, especially among mid-sized and smaller companies, to search for innovative and effective ways to control costs over the longer term.

These pressures to identify and control expenses, coupled with greater awareness and understanding of the group captive insurance model, have prompted many to realise that the benefits of captive insurance are now just as viable for mid-sized companies as they are for larger corporations. As a result, group captives have become an increasingly attractive alternative to standard insurance for such insureds.

However, before surveying the specifics of group captives, let’s briefly revisit the concept of captive insurance and what makes it attractive.

Captive insurance basics

Captive insurance, while dating back to the 1950s, has enjoyed increasing popularity in recent decades. The basic concept is simple: a captive insurance company is wholly owned and controlled by those it insures. Its primary purpose is to insure the risks of its owners. Because the owners are also the insureds, they are able to exert much greater control, especially in regard to the types of risks insured and the decision process surrounding underwriting, as well as loss control, operations, and management.

Once organised, a captive provides the same functions privately that a standard commercial insurer does on a more public basis. Namely, it issues policies, collects premiums, and pays claims, although it is regulated specifically as a captive. Because it manages specific, agreed-upon risks in a controlled and measurable way, the captive insurance strategy has become an enormously powerful business planning tool and the group captive model extends this important tool to mid-sized companies.

Captives are now recognised internationally, with numerous countries and jurisdictions welcoming formations. These include onshore jurisdictions in the continental US such as Vermont, South Carolina, North Carolina—as well as offshore domiciles in the Cayman Islands and Bermuda amongst others.

The ins and outs of group captives

A group captive is an insurance company owned by several individuals or member companies, which insures the risks of its members. It exists primarily to provide greater long-term cost stability than the traditional market allows.

In other words, each group member’s captive premium is based upon that member’s own loss experience, which the member has the ability to control. In addition, group captive operating expenses are typically lower than those experienced in the
open market.

Group captives may be either homogeneous or heterogeneous. That is to say, they may either be all from the same industry or representative of different industries.

Homogeneous captives have the added advantage of pooling the risks of like-minded members who are familiar with the types of risks and loss experiences being insured.

Heterogeneous captives typically involve member companies similar in size but representing different industries. Either way, economies of scale are attained through aggregating risk exposures across the membership and often by demonstrating a better than industry average historical loss experience.

There’s another potential bonus. Group captives typically offer terms and conditions–for example, premiums and coverages–that are comparable to those available in the standard market. However, group captives may have provisions that allow for a distribution in the form of a dividend from the captive in the event a member shows favorable loss exposure.

Essentially, this is a way to turn ‘best in class’ performance into pricing commensurate with one’s exposure. In some instances, participating in a group captive may even allow companies to obtain coverage that would be deemed too expensive individually or indeed simply unavailable in the standard market.

How a group captive benefits you

Perhaps the most obvious advantage of joining a group captive is the ability to insulate oneself from insurance cycles over the long term by controlling one’s own risk exposure and insurance costs.

A closely related benefit is the provision for greater loss prevention and risk management. With a group captive, a certain portion of each member’s premium is allocated to loss prevention and claims management.

Thus, a member may apply this allocation on the basis of its specific historical loss prevention needs. This type of benefit is common whenever a company is able to manage its own risks.

Group captives may also exert greater control over their programme expenses, as well as make changes to services offered with lower cost or disruption. In addition, as a group they may access more favorable reinsurance pricing. In short, these types of benefits have always accrued to those able to withstand the higher premium levels paid by single-parent captives but have been unavailable to owners of smaller businesses or those requiring less coverage from their captive insurance structure.

The group captive model makes similar benefits available to them.

The most common types of insurance covered by a group captive include traditional property and casualty lines such as general liability, workers’ compensation, automobile liability and physical damage, and product liability coverages.

Those groups adding more complex coverages, including medical liability, are becoming increasingly popular.

More generally, group captives offer greater transparency for those seeking greater loss control, as well as a far more collaborative process.

The success of a group captive depends in large part upon ensuring that the participants’ loss controls and risk management are both rigorous and sophisticated.

It is critically important to be sure that the group captive programme is well designed and that the underwriting of new insureds is thorough.

A group captive thrives on growth. And that growth ultimately depends upon maintaining both a favourable risk profile and the right mixture of insureds within the group over the long term.

Keeping those objectives in balance requires not only a deft hand at the wheel, but also executives with both the willingness and ability to maintain the captive’s course over the long haul.

The principals would be well advised to seek an adept captive manager to assist them in their responsibility to be attentive to the needs of the participants and the captive itself.