For business leaders seeking to break free from the unpredictability and high costs of traditional insurance, Group Captives offer a compelling solution. By joining forces with like-minded companies, businesses can take control of their insurance destiny, gaining access to lower costs, tailored risk management strategies, and greater financial stability.
Unlike conventional insurance models—where premiums are dictated by the broader market—Group Captives reward proactive risk management and transparency, allowing companies to benefit from their own safety efforts rather than subsidizing higher-risk businesses. This collaborative approach fosters a culture of continuous improvement, as members work together to mitigate risk and drive down costs.
The book The 10 Laws of Insurance Attraction emphasizes the importance of taking control of your risk profile rather than simply shopping for the lowest quote. Group Captives embody this principle, empowering business leaders to influence underwriting, claims management, and loss prevention strategies—ultimately creating a stronger, more resilient organization.
But is a Group Captive the right fit for your business? Let’s explore the key advantages and important considerations to determine whether this innovative risk-financing model could unlock new opportunities for your company.
Key Advantages of Group Captive Programs
- Enhanced Control and Transparency
Unlike traditional insurance programs, Group Captives provide members with a significant degree of control over their insurance destiny. As owners of the captive, members actively participate in decision-making, governance, and the overall strategic direction of the program. This includes involvement in underwriting, claims management, and risk control initiatives.
This level of control translates into greater transparency. Members have direct access to detailed information about their claims experience, loss trends, and the captive’s financial performance. This transparency empowers them to make informed decisions and implement targeted risk management strategies to improve their results.
- Potential for Significant Cost Savings
One of the primary drivers behind the growing popularity of Group Captives is their potential to generate significant cost savings. By pooling resources and sharing risk, members can reduce their reliance on traditional insurance carriers and avoid the associated profit margins and administrative expenses.
Group Captives allow members to retain underwriting profits that would otherwise go to insurance companies. If the captive performs well and claims are managed effectively, members can receive dividends or premium reductions, further enhancing their cost savings.
The big advantage is that the premium deductibility, including the amount paid for your loss funds, is tax deductible. Your potential “profits” will be earned as a dividend and may be taxed as capital gains depending upon your captive ownership structure and nature should your captive declare a dividend several years down the road. In high deductible and self-insurance, only paid claims can be deducted for tax purposes, and you will have to pay taxes on the claim reserves you set aside.
- Tailored Risk Management Strategies
Group Captives enable members to develop and implement risk management strategies tailored to their specific needs and industry. By sharing best practices and collaborating on loss control initiatives, members can create a safer and more efficient work environment.
Captive programs can also provide access to specialized risk management expertise and resources that may not be readily available to individual companies. This includes consulting services, safety training programs, and advanced data analytics.
- Alignment of Interests and Shared Responsibility
Group Captives foster a strong sense of alignment and shared responsibility among members. Because everyone has a vested interest in the captive’s success, there is a collective commitment to managing risk effectively and controlling costs.
This shared responsibility encourages members to actively participate in risk management initiatives, share information openly, and support one another in improving their safety performance. This collaborative environment can lead to a culture of continuous improvement and enhanced risk awareness.
- Access to Broader Coverage Options
Group Captives can provide access to broader and more flexible coverage options than traditional insurance policies. Captives can be customized to address specific risks and exposures that are unique to the members’ industry or business operations.
This flexibility can be particularly valuable for companies with complex or emerging risks that are not adequately covered by standard insurance products. Group Captives can also provide coverage for risks that are difficult or expensive to insure in the traditional market.
- Stability and Long-Term Control
Group Captives offer stability and long-term control over insurance costs. Unlike traditional insurance, where premiums can fluctuate significantly based on market conditions, Group Captives provide a more predictable and stable cost structure.
As owners of the captive, members have the power to influence premium rates and coverage terms. This long-term control allows them to plan their insurance expenses more effectively and avoid the uncertainty of the traditional insurance market.
- Building a Stronger Safety Culture
The focus on risk management and loss control within Group Captives can contribute to building a stronger safety culture within member organizations. By sharing best practices and collaborating on safety initiatives, members can create a safer and more efficient work environment.
A strong safety culture can lead to reduced accidents, injuries, and workers’ compensation claims, resulting in lower costs and improved employee morale.
- Group Captive Structure
Group Captive entails joining a group of other companies with a significant focus on preventing and mitigating claims. In a group captive, you may be able to enter the captive for as little as $100,000 in casualty lines premiums. However, most group captives require $250,000 or more for casualty lines premium. Due to the lower premium requirement as an entry point compared to self-insurance and the lower state insurance department regulatory compliance of self-insurance, you can see why Group Captives are the most popular form of alternative risk financing.
An additional advantage of a group captive is that you can receive a higher risk-reward similar to self-insurance when your premiums are not large enough to meet the regulatory requirements of self-insurance. Plus, you do not have to deal with all the regulatory headaches associated with being self-insured.
Several Words of Caution:
However, one of the things that occurs, and a company has to understand, is that many employers go into them assuming they will reduce their overall insurance cost. However, their downfall is that their house is not in order. When you calculate and analyze their costs, they may still be paying too much. The cause of higher costs could be the frequency and/or severity of claims caused by a lack of attention to the entire risk management cycle as they are focused on other things going on in their organization.
I met the CFO of a multi-state retail store chain at a conference where I spoke. He approached me after my session and asked why I believed that the experience modifier could also be used as a benchmark in determining how well one is managing risks. He stated that experience modifiers do not apply to his company, since his company was in a captive, and modifiers do not impact his premium. It turned out that in each state of operation, his company suffered from surcharged experience modifiers.
I agreed with him that insurance costs will typically be lower in a captive than guaranteed cost coverage. However, I then questioned why his company, in comparison to their peers, was still having a higher frequency or severity of claims and therefore paying too much out in terms of “insurance costs.” He responded that he had not considered it in this light. He believed his company was getting the lowest premium using a captive versus a guaranteed-cost program. However, he did not fully realize his company was still paying too much due to too many claim costs. The company was not where it could have been if its house had been in order and its claims under control. In other words, his false sense of lower costs in a captive was keeping him from seeing that he was still dipping into his checkbook far more than he should have.
Even though you may be in alternative funding, you must continually analyze and benchmark your results. You must compare yourself with your peers and other organizations and determine your experience modifier if you were not self-insured.
This continual process of benchmarking and monitoring your performance determines whether you achieve your ultimate goal of paying the lowest possible insurance costs. Ensure that your program design does not mask your problems, thus causing you to waste significant dollars that could be better used elsewhere within your organization.
Conclusion
Group Captives offer a powerful and compelling alternative to traditional insurance programs. By pooling resources, sharing risk, and actively participating in risk management, business leaders can unlock significant cost savings, enhance their control over insurance strategies, and foster a stronger safety culture within their organizations. While Group Captives may not be suitable for every company, they represent a valuable option for forward-thinking organizations seeking to take greater control over their insurance destiny and drive long-term success. As with any complex financial decision, it’s crucial to conduct thorough due diligence and seek expert guidance to determine if a Group Captive is the right fit for your organization.