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Group Captives 101: What is a Group Captive?

By Sean Flavin August 12th, 2021

This article is the second installment of our Group Captive 101 series: "What is a group captive?" If you missed our first article covering the general concept of captive insurance, click here to read it.

For decades, organizations have turned to captive insurance as a mechanism to manage risk outside of the conventional insurance market. Like self-insuring (and captives are essentially a form of self-insurance), captive insurance allows companies to achieve greater control over their programs and lower overall costs.

As a risk management practice, captive insurance has been around for more than a century. At inception, captive insurance was reserved for large companies with extensive capital available to handle significant losses. However, as the practices have evolved, the metaphorical doors have opened to small- and mid-sized companies in the form of group captives.

In this article, we’ll tackle the question “What is a group captive?” to help you understand the concept and how it could potentially benefit your company.

What is a Group Captive?

In the first installment of this series, captive insurance was defined as “an insurance company owned by the organization that it insures. Rather than paying a conventional commercial insurance company, a captive owner chooses to retain certain risks at lower costs while still transferring others (often, catastrophic losses) to an insurer." A group captive is a captive insurance company owned by a collection of organizations rather than a single business.

Single-parent captives (i.e., owned by one company) are typically viable for large, well-capitalized companies. While small- to mid-size companies often lack the scale to create a captive on their own, they can enjoy many of the same benefits by combining forces with other like-minded companies.

There are several ways to structure group captives, and the details can vary widely. Here are two of the principal ownership structures:

  • Owned: In an owned captive, the policyholders are the owners. They hold the capital and manage the operations of the captive.
  • Rented: A “rent-a-captive” is a licensed insurer owned by an outside organization that provides many of the functions of the captive for a fee.

At Captive Resources, we specialize in a member-owned model that we first created in the 1980s and have been cultivating ever since. Today, we work with more than 40 group captives that leverage our member-owned model, which can be customized to fit each group's needs. With that in mind, this article will focus on the member-owned model used by the captives we work with; the descriptions below do not necessarily apply to all other group captives.

Member-owned Group Captives

A member-owned group captive is an insurance company formed and controlled by multiple organizations to insure certain risks for the member companies. There are two important characteristics when it comes to the member-owned model used by the group captives we work with:

  1. The group captives are wholly owned and controlled by the member companies.
  2. The group captives only insure the member companies that own the captive.

Group Captive Insurance Coverage

 Group captives aren't designed to cover all lines of insurance for member companies. Higher frequency, lower severity lines typically work well for group captives. The group captives we work with do cover an array of risks, including casualty (workers’ compensation, general liability, and automobile), property, and health benefits.

Homogeneous vs. Heterogeneous Group Captives

Since a group captive is a mix of unrelated companies sharing risk, the composition of the captive is an important consideration. There are two main types of group captives that we work with — heterogeneous and homogeneous. Based on your company's risk profile, industry, loss history, and risk management needs, you may find one arrangement more beneficial than the other. 

  • Heterogeneous: Comprised of member companies from diverse industries.
  • Homogeneous: Comprised of member companies from the same industry.

Member-owned Group Captive Management / Operations

While the members own and control the captive, representatives from these companies have to focus on running their own businesses. The member-owned group captives we work with use a captive management company to handle the day-to-day operations like:

  • Overseeing governance
  • Regulatory reporting
  • Cash management and accounting
  • Audit and tax coordination
  • Corporate secretarial functions (including compliance)

Ultimately, the captives’ board of directors, comprised of the members, are the final decision-makers. In the group captives we support, each member company appoints a director to the board, and each has an equal vote regardless of company size. Each captive also has bylaws to address various organization concerns, like the process and standards for allowing new companies to buy in and become shareholders.

The group captives then contract industry service professionals and third-party administrators to handle various insurance functions like claims management, loss control, policy issuance, reinsurance, and actuarial services. These services are typically "unbundled," which allows the captive greater flexibility to partner with the right professionals for each discipline.

As the captive consultant, Captive Resources oversees many of these various functions and advises each captive’s board. Consultants are also integral in the formation and growth of the captives, as well as supporting members risk control performance. Effective risk management is a crucial component of the member-owned group captive model and Captive Resources provides a variety of risk control services to help members improve workplace safety, reduce incidents, and lower costs.

Companies that Succeed in Group Captives

Group captives can be an excellent choice for companies of varying size, revenue, and industry. While there isn’t one set profile, here is an overview of the characteristics we've found in companies that are the most successful in group captives.

Behaviors and Mindset

  • Safety-Conscious
  • Accountable
  • Entrepreneurial

Business Profile

  • Long-term financial strength and stability.
  • Management teams are committed to safety, with solid safety programs in place.
  • Loss histories that are better than average for their respective industries.
  • Annual casualty premiums of at least $250,000, with a minimum of $100,000. (Many group captive members have premiums between $1 to $5 million, with some as high as $25 million.)

Industries

  • Manufacturing and distribution
  • Construction
  • Transportation
  • Temporary employment agencies
  • Retail
  • Food and beverage production
  • Hospitality
  • Health care services
  • Agri-business
  • Oil and gas well operations/services

Now that we've answered the question "What is a group captive?" if this sounds like something that could benefit your company, contact us today to learn more.

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