A risk management technique involving the formation of a policyholder owned insurance company to finance the retained losses of the owner of the captive and its participants. The captive may be used to fund any number of types of losses, but has been used mainly to finance Workers Compensation, General Liability and Auto Liability. Captives are often formed when insurance cannot be purchased from insurance companies for an acceptable premium.
Group captive insurance programs can be an attractive alternative to traditional insurance. As the insurance market tightens and premiums increase, captives offer a new level of control and financial independence.
What is a group captive?
It's an insurance company that provides insurance to and is controlled by its owners. In short, you (and several other businesses) own the company that provides your commercial insurance. Which means that you have greater control, and you - not an insurance company - benefit when the captive is profitable. In addition, you have minimal administrative obligations. The program is administered by a captive management company that provides the necessary structure, claims management, legal, accounting and other functions necessary to operate.
Benefits of a Captive
• Greater control over your insurance program
• As a shareholder, you accrue tax deferred underwriting profit
• As a shareholder, you benefit from investment income
• Premium calculation is based on your prior five-year loss history, not industry averages
• 60-68% of premiums will be available to fund losses and generate investment income
• Greater control over claims management
Consider a Captive if Your Business Has:
• A favorable prior loss history
• A commitment to controlling losses
• Financial stability
• Casualty premiums that exceed $150,000 (auto, workers' compensation and general liability)
Calculating Your Premium
One advantage of a group captive is that your premium calculation is simple. The calculation is based on your five-year history of incurred losses and underwriting exposures (sales, payroll, auto), rather than industry averages or the current profitability of an insurance company. Based on your history, the captive develops a loss projection, and you pay a fixed premium with final costs determined by incurred losses. Therefore, if losses are controlled, you may actually get a return on your insurance expense - up to 70% of your premiums.
Group captives provide an interesting and smart alternative to traditional programs.
For more information contact Duke Niedringhaus, ARM or call 314-594-2700.