Captive insurance is sometimes used by businesses with high and/or unique risk profiles. The insurance structure is a solution when coverage is either unavailable or unaffordable through the commercial marketplace of traditional insurance policies. Through a captive, the corporation has the ability to professionally and tax efficiently build up funding within their organization to enable themselves to retain and manage certain risks within their company rather than paying an outside insurance company to do so. Companies appreciate the control that a captive gives them over their funding.
Depending on the specifics of their situation, businesses might use a captive to:
- Secure highly specialized coverages for unique risks not covered in the traditional marketplace such as supply chain interruption, product recall expense, etc.
- Reduce insurance-associated costs by setting aside premiums to cover deductible and retention risks they do incur.
- The option to retain and shore up profits and equity capital inside the owned captive rather than spending it on an outside insurer.
- Potential tax benefits for retaining risks within the company’s captive.
- More professional management of assets.
- Ensuring proper funding for any retained risks or claims.
Advantages of Group Captives
1. Greater Control
Businesses have more control over their insurance coverages because they can better select and set up coverages according to their needs. Even in group captives where multiple businesses negotiate coverage terms, specialized protections are still available (especially through homogenous group captives).
2. Business-Specific Premiums
The premiums assessed for group captive insurance are based on a business’s particular risk profile and claims history. This is distinct from traditional commercial insurance, which is also largely influenced by industry trends. Limiting premium calculations to an individual business’s profile and history is fairer, and protects businesses from undue market trends that raise rates.
3. Cost Reduction
The business structure of group captives enables businesses to control their total cost of risk and their risk financing. The total cost of risk is decreased when businesses reduce the number of claims, as premiums are heavily based on claims and subsidiaries retain any profits from unpaid premiums. Risk financing is more manageable because the insurance is so customizable.
4. Heightened Safety
The financial incentive to reduce rates causes businesses to have a heightened awareness of safety. One survey found that companies with captive insurance experienced 48% fewer fatalities and 22% fewer worker’s compensation claims compared to their traditionally insured counterparts. Employers and employees alike benefit when accident rates are reduced.
5. Transparency
Owning and operating a subsidiary gives businesses comprehensive transparency of how their insurance premiums are being managed. Premiums, overhead, claims payments, and other expenses are all readily available for businesses to review.
6. Increased Profits
Businesses can benefit from underwriting profits and investment income that their subsidiary generates. This combined with cost savings may make captive insurance quite financially beneficial.
1. Property and Casualty Captive (P&C Captive)
The specific coverages being provided are created when the subsidiary is set up. Coverages can include any or all of the common protections that would be expected in a traditional commercial insurance policy. Coverages often also include specialized protections, which may be structured as distinct uncommon coverages or as particular terms within more common coverages.=
Some highlights of coverages that would be included in a fairly typical group P&C captive are:
General Liability Coverage
Insure against common “slip and fall” accidents, defamation lawsuits, and false advertising claims.
Auto Liability Coverage
Insures against vehicle accidents in which employee drivers are responsible for causing injuries and/or property damage.
Auto Physical Damage Coverage
Insures against damage that company-owned vehicles sustain during collisions or non-collision accidents.
Workers Compensation Coverage
Insures against workplace injuries and illnesses that employees sustain while on the job.
Specialized Coverages
This can insure against a range of particular risks depending on a business’s situation and coverage terms.
When is a Group P&C Captive a Good Fit?
Group captive insurance should be evaluated on a case-by-case basis, as every business’s particular risk profile, premiums and coverage needs should be considered on their own. In general, however, businesses are good candidates for a group captive if the business:
- Pays combined property and casualty insurance premiums of at least $125,000, which includes general liability, commercial auto, and workers' compensation premiums.
- Wants to reduce insurance costs and better manage risk financing through an alternative solution.
- Prefers insurance premiums to be based on the business’s actual losses rather than industry averages (or has losses below the industry average).
- Has a 5-year loss history of incurred claims consistently being below 50% of the premiums paid (across all coverages).
- Commits to taking proactive measures that will improve overall safety and reduce accident rates.
In short, businesses that are financially stable and consistently pay high insurance premiums relative to the claims that are paid out by their insurer should consider whether group property and casualty captive insurance is right for them. This evaluation is somewhat complex, so businesses ought to work closely with a knowledgeable insurance professional who specializes in captives when making this evaluation. Businesses should look at joining a group captive as a long-term decision, as entering and leaving a captive is more complicated than simply changing insurance companies.
2. Healthcare Captive
One of the biggest challenges in paying for healthcare is that there are no regulations on what doctors, hospitals, and other providers can bill for their services. In fact, some for-profit hospitals may charge insurance companies more than 2.5 times the amount Medicare will cover for their services. Studies indicate that, in some cases within the standard insurance company environment, those rates may even be a lot higher. It’s important for companies to know that alternative options are available.
Group health captives offer several advantages that make them a wise choice for employers looking to take control of their healthcare coverage and spending. Some of these advantages include:
1. Access to Turnkey Coverage Solutions
Group health insurance captives don’t require you to start from scratch. In fact, joining a group health insurance captive gives you immediate access to established programs and solutions your company can use to improve healthcare immediately.
2. Relationship with Top Tier Carriers
Choosing a group health insurance captive does not mean you will be receiving inferior coverage or benefits. In fact, for many companies, joining a group captive improves access to coverage. With a group health insurance captive, you will have a direct risk relationship with re-insurance partners who are typically very highly rated and stable partners.
3. Experience and Flexibility
When you join a group health insurance captive, you can take advantage of all the knowledge and experience of the other members. You will also enjoy greater flexibility than you could ever achieve with traditional insurance options.
4. Reduced Middleman Expenses
A group health captive allows your organization to purchase coverage wholesale, rather than retail. This means you can reduce some of the overhead expenses by cutting out the middleman and making purchases directly.
5. Dedicated Program Services and Support Team
You may worry that joining a group health insurance captive would leave you without the support you need. However, a good quality group captive claims administrator, and agency partner are all there to provide a dedicated support team, as well as other services you need to manage your organization’s healthcare insurance successfully.
6. Help with Risk Management
Group health insurance captives offer their members customized risk management assistance, as well as access to leading industry strategies that can be used to improve how you choose to manage this area of corporate risk
Who Should Consider a Healthcare Captive?
A healthcare captive is not the right choice for every organization. However, you may benefit if:
- Your company has at least 50 or more employees who are eligible to receive health benefits.
- You have a forward-thinking management team capable of handling an “outside-the-box” health insurance solution.
- You are willing to maintain open communication with employees about healthcare expenses.
- Your company is willing to implement robust health and wellness programs to improve the overall health of employees and reduce costs.
- You are financially stable enough to accept a portion of the health program’s risk.
Could a healthcare captive be the right fit for your company? Take our quiz below to find out.
The answer for most companies is maybe.
Whether you should join a captive depends on many different factors, including your risk perspective and your goals. To decide whether you should pursue this option, you need to have a clear understanding of where your company is currently and where you hope to go in the future.
The decision to join a captive is based on a careful evaluation of what’s right for your organization. If, in fact, a group captive makes sense as part of your long-term strategy, then it may be a fit. However, there may be several other options you should consider before ultimately coming to the conclusion that you want to join a group captive.
Winter-Dent has all the resources to evaluate your current position and help you structure a program that’s right for you. We will walk you through the process every step of the way to make sure you don’t face any unwanted surprises.
Our ultimate goal is to help your company succeed with whatever health insurance strategy is chosen. How we do that is a process called 4Sight that is revolutionizing the risk management industry. It's what sets us apart - something we call the Winter-Dent Difference.
Winter-Dent is an expert on captives. We understand how they work, the advantages they provide, and the drawbacks our clients may face when they select this option. Whatever your final decision may be with regard to your company’s healthcare strategy, we want you to be aware of all of your options and understand how each possible decision will affect your company and your employees, both today and in the future. We are committed to bringing the best options, resources, and information to the table so that you can minimize your risk and maximize your control.
