Group Captives 101: Why Form a Captive Insurance Company?

By Sean Flavin September 14th, 2021

Welcome to the fourth installment of our Group Captives 101 series, where we'll answer the question "Why form a captive insurance company?” If you missed any of the previous articles in the series, you can find them here.

As we recently covered, commercial insurance premiums have been on the rise for almost four consecutive years. According to The Council of Insurance Agents & Brokers (CIAB), the pricing increases have been sweeping, with little discrimination based on company size, line of business, or risk profile.  

As the premier consultant to member-owned group captives, we understand how insureds and their brokers must try to navigate a marketplace where they have little leverage. This lack of influence and control led to the formation of Captive Resources. We developed our member-owned group captive model to help best-in-class companies take control of their insurance programs, helping to mitigate the impact of insurance market volatility.

We mention all of this to preface the question "Why form a captive insurance company?", because much of the answer comes down to control. While we can't speak to every reason a business would form or join a captive, we work with 5,400 companies across more than 40 member-owned group captives. From that experience, we've seen the positive impact that comes when a company makes the shift from being an insurance buyer to an insurance company owner.

While this increased control manifests itself in various ways, we've organized it into three main categories to help us explain why an organization would form a captive or join an existing one.

No. 1: Greater Control Over Costs

Forming a captive or joining a member-owned group captive affords a company the necessary control to lower its total cost of risk, including risk transfer costs. In fact, in a recent study across multiple group captives we work with, we discovered that almost three-quarters of new members saved money upon joining, compared to the costs of their previous plan in the conventional market.

When it comes to the group captives we support, this control over costs is exercised in a few ways:

  • Premiums are based on a member company's actual loss record rather than the generic rates pervasive in the conventional insurance market, meaning a company has the opportunity to lower its premiums through strong safety and risk management to control losses.
  • The captives provide extensive, state of the art safety and loss prevention resources to the members to assist them in the continual efforts to drive down losses.
  • Overhead expenses like acquisition costs, advertising, and operations are significantly reduced or eliminated altogether.
  • Group captive members can also earn dividends on unused funds set aside to pay losses, which can further lower the companies’ overall insurance investments (we’ll touch on this more in the third category).

No. 2: Increased Control Over Insurance Program

As an owner of an insurance company — rather than just the holder of an insurance policy — captive members enjoy more control over facets of their insurance program like:

  • Participation in claims management and adjudication via periodic claim reviews with adjusters and consultants.
  • Ultimate decision-making authority with regard to the selection and management of third-party service providers. Operations are outsourced to third party service providers which helps the member-owners to maintain quality services at a competitive cost.
  • Members are able to make decisions regarding coverage enhancements, and specialized coverages.

The group captives we work with equally distribute ownership among the member companies. Regardless of size, each member is an equal shareholder with one seat and one vote on the captive’s board of directors. Members also participate in committees that are instrumental in making strategic and operational recommendations to the board.

No. 3: Greater Emphasis on Risk Management

The group captives we support take a special interest in helping members manage risk. After all, as captive owners, members have an inherent incentive in seeing their fellow members reduce claims costs. When members manage risk effectively, the group captive pays less toward claims, which allows the captive to invest the unused loss funds. Once the captive is ready to close an underwriting year, those dollars are available to be returned to the members in the form of dividends.

And the profit potential in a group captive is far from theoretical. In an independent study of 15 mature group captives that we support, members earned dividends in 98 percent of the 233 closed accident years reviewed in the study. 

The group captives we work with are there every step of the way to make sure each member has the resources needed to manage risk effectively. As the captive consultant, we oversee many of these risk control efforts, including:

  • Regular Risk Control Assessments (RCA) that, in coordination with an independent safety consultant, are used to develop action plans for members.
  • Risk control group purchasing program with high-quality vendors that offer discounted products and services designed to help companies control losses.
  • Educational opportunities like in-person workshops and virtual events allow members to learn the latest in risk management strategies and tactics from top subject-matter experts in the field.

Why Form a Captive Insurance Company?

If your company is looking for a way to insulate itself from the harsh conditions of the commercial insurance market, a captive insurance company is definitely an option worth exploring. Becoming an owner of an insurance company, rather than just a policyholder, offers companies significant control over aspects like insurance costs, program management, and risk control.

To learn more about joining one of the member-owned group captives we support, contact Captive Resources.

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