Group Captive Insurance: Take Control of Your Insurance Strategy

March 19th, 2024

This article was written by Sarah Viksjo, Captive Practice Consultant, Gallagher: https://www.linkedin.com/in/sarah-viksjo-82018517/

What is group captive insurance?

A captive is an insurance company owned and controlled by its policyholders. A group captive insurance program enables financially stable and risk-conscious companies to take long-term control over their insurance costs. These organizations align with like-minded companies to form a group captive insurance company that selects appropriate workers compensation, general liability, and auto liability insurance for their businesses, along with key service providers. Group captive members pay premiums based on their individual loss experience, not insurance industry experience. Moreover, any unused loss funds and investment income is returned to members as a dividend.

Who might a group captive solution work for?

Any business that is financially stable and has strong safety, risk and claims management practices may benefit from a group captive program that provides workers compensation, general liability, and auto insurance.

What are the advantages of a captive program?

  • Your maximum costs are capped in a captive program.
  • Collateralization in traditional insurance programs can be unlimited and is determined by the insurance company. Collateral in a captive program can be posted using a letter of credit or cash and is capped based on loss funding.
  • Risk transfer or operating costs in a captive program are substantially less than a traditional program.
  • Umbrella placement over a captive is more easily negotiated with the recognition that captive members are “best in class.”
  • Increased control over your insurance costs. Members participate in a risk management program designed to meet their specific needs. They enjoy being a part of the selection of service providers and actively participating in the claims management process.
  • Reduced costs as premiums are based on your company’s expected losses. Premiums are likely to be more stable from year to year in a captive program and will allow you the ability to retain investment earnings normally enjoyed by your traditional insurance carriers.
  • Continuity of coverage – Simplified renewal process, with no bidding upheaval or surprises.
  • Competitive advantages – Reduce your fixed costs to improve your bottom line.
  • Forum for exchange of ideas – Learn from fellow members’ experiences.

How are losses funded?

Your company’s eligibility to participate in the captive is predicated on having a good loss history and effective loss control programs in place. Nonetheless, losses may occur. The captive is structured to provide coverage for losses within a set threshold determined by the captive’s Board of Directors.

  • Losses falling within this range will be paid from the assets of the captive up to each member’s actuarially established threshold for projected losses.
  • Large losses exceeding the captive’s retention levels will be offset through the purchase of reinsurance.
  • In addition, there are further safeguards to ensure payment of claims in the event multiple captive members suffer unexpected large losses. In the event a member’s cumulative losses exceed their total loss allowances, these losses will be shared with other captive members. This risk distribution mechanism will be determined based on the needs of the captive members and set forth in the captive incorporation agreement.
  • As a last resort, financial support would also be forthcoming from an insurance carrier whom the captive will select to “front” the overall program. In the unlikely event all members’ loss funds are consumed in any one year the fronting carrier provides excess reinsurance

What’s my investment?

Capital Contribution

  • Captives require a one-time capital contribution of $25,000 – $36,000. This is placed in your investment account and is returnable with interest if you leave the captive and have no outstanding financial obligations.

Collateral

  • Each member must post collateral equal to 2/3 its annual A or frequency loss fund for up to three years. Collateral can be either a letter of credit or cash.

Broker Fee

  • Most captives do not pay brokerage commission; hence we charge a professional fee for our services. We will negotiate that with you based on anticipated work.

Assessments and surcharges

  • State workers comp. board assessments and state and federal terrorism charges apply in addition to premium as they do in the traditional market.

Put our experience to work for you – Arthur J Gallagher’s team of professional insurance consultants has been implementing group captive solutions for companies of all types for over 20 years. Please contact Sarah Viksjo, Gallagher Captive Practice Consultant, at sarah_viksjo@ajg.com or 716-512-0660 for more information.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

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Sarah Viksjo
Captive Practice Consultant

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