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Is Group Captive Insurance Right For Your Client?

August 24, 2023

Q: What is a Captive and how can it help my client?

A: Every company fights an unending battle to control expenses. Companies buying insurance in the traditional marketplace are often frustrated as insurance premiums, over which they have little or no control, fluctuate (mostly upward), sometimes wildly. For companies that prioritize safety and risk control, a captive insurance solution could help stabilize and reduce insurance costs, create a culture of safety and ultimately provide a competitive advantage.

The definition of a “captive” is simply an insurance company that is owned and controlled by its insureds. To the extent the insurance is profitable, the benefit inures to such owner-insureds. Captives come in many forms and the best structure depends upon many factors. Generally, for larger companies with significant premiums and many affiliated entities, a “pure” or “single-parent” captive might be most beneficial. For many remaining companies, a “group captive” will likely be most beneficial. Now is a great time to explore a group captive solution as group captives are flourishing.

Q: What is a Group Captive and what are some of its benefits?

A: Group captives come in many shapes, structures and sizes. They essentially allow companies that may not be large enough (from an insurance dollar standpoint) to form their own single-parent captive, to come together and participate in a captive program. If these companies have positive losses, they should be able to lower and stabilize their overall insurance costs.

Another less obvious benefit for companies participating in group captives is that such companies typically become much better from a safety, risk management, and claims-handling standpoint. Group captive members are working with their own dollars rather than insurance company dollars and are accountable to the other group captive members, with whom some risk is shared (leading to the risk distribution necessary to constitute “insurance,” which in turn allows for premium deductibility). Group captive participants are also able to share risk control and operational best practices.

Q: For whom are Group Captives best suited?

A: Group captives are ideally suited for companies that operate in industries with inherently difficult risk profiles, leading to volatile, high pricing in the traditional insurance market. The best candidates are the companies in those industries that are best-in-class from a safety standpoint but are nevertheless still priced with the industry.

Additionally, any company that spends significant insurance dollars and that has made risk reduction, safety, and aggressive claims handling a priority will benefit from the group captive model. Likewise, companies that have not acted yet but have a desire to take control of their risk management costs and make themselves safer will always be good candidates. Indeed, companies looking to leverage safety as a market differentiator will always benefit from the group captive structure.

Q: What has led to the popularity of Group Captives?

A: The Great Recession helped fuel the current popularity of group captives as surviving businesses started scrutinized their expenses, including insurance expenses. Corporate purchasers of insurance have become much more sophisticated. Group captives have also become smarter, more efficient, more transparent and increasingly competitive.

The strengthened economy (especially in the U.S.) following the Great Recession also contributed greatly to the current success of group captives. As companies thrived, the demand for traditional business lines of insurance (workers compensation, general liability, auto liability, property, etc.) increased, as did the demand for newer insurance lines, such as cyber liability. Medical expenses and health care costs remain high, and the reinsurance markets have been impacted by natural disasters (fire, hurricanes, etc.), the COVID-19 Pandemic and other global events. Auto liability in the U.S. has increased dramatically as jury awards have skyrocketed. General liability rates have also increased. Additional regulations in jurisdictions such as New York, California and Illinois, and in certain industries, has caused rates to increase or insurers to exit the market altogether.

Q: How does my client look into Group Captives?

A: Many insurance brokers are reticent to assist their clients with investigating group captive options and will even speak negatively and falsely about captives. Why? The reasons are legion and include ignorance or misunderstanding regarding how captives work and the benefits of captives, protecting their turf, fear of or resistance to change, directives from superiors, existing insurance relationships, and pure laziness. The potential benefits to your client (or your company) are far too great to let this deter you. Do your own research and contact a reputable insurance broker, insurance consultant, attorney or accountant well-versed in the group captive industry to address feasibility and implementation. In the end, the only risk lies in doing nothing.

Please reach out to a Kerr Russell attorney to discuss your options, or for any other questions you may have regarding Captive Insurance.