Captive Insurance 101: What Businesses Need to Know

A hardening commercial insurance market over the last two years has brought about growing interest and conversations surrounding captive insurance. The Insurance Information Institute (III) defines captives as “a special type of insurance company set up by a parent company, trade association or group of companies to insure the risks of its owner or owners.” In short, they are insurance companies owned by the people they insure, and they have been around for decades. Captives are established to meet the unique insurance and risk management needs of owners or members and can cover most major risks underwritten by a commercial insurer.

Companies often consider forming or joining captives if they want more control of their insurance program including safety and claims management. In addition, Business Insurance recently reported that “Existing [captive] owners are also expanding the use of their captives as they face higher insurance rates and tightening capacity in traditional markets.”

A captive insurance company can be set up in a variety of ways. The National Association of Insurance Commissioners (NAIC) lists a full classification. To simplify this, think of “pure captives” as those who insure only their owners, “single-parent captives” as those with a single owner such as a large, Fortune 500 company and “group captives” with multiple owners.

A group captive option is the plausible fit for organizations who may not have the resources to form a “single-parent” captive. According to the International Risk Management Institute, Inc. (IRMI), there are benefits and potential challenges to joining a group captive. Benefits (both long and short term) include:

  • Influence over premium costs since premiums are based on member’s own loss experience
  • Reduced operating expenses and overhead
  • Mass purchasing power
  • Control over the claims process
  • The ability to offer coverage tailored toward certain high-risk industries or professions
  • Greater profit potential – any underwriting profit is returned to members through dividends 

Potential challenges (both long and short term) include:

  • Differing member needs
  • Decision making problems
  • Potentially higher costs – both up-front and over time
  • Conflicts related to distribution of underwriting profits
  • Conflicts related to cost allocation and the rating process
  • Reduced confidentiality
  • Additional management time

If you are a business and are wondering if it is workable or worth it to join a group captive, there are many factors to consider. If you would like to continue this conversation or if you have any questions, we can help! Please contact us here or by calling 800-242-2433.

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