Each business that joins a Group Captive is an owner and as such is also a member of the board with one vote.  The Board of Directors makes all major decisions for the Group Captive. 

For a Group Captive to be compliant, the members must share in the risk of their membership pool.  Most of this shared risk is financed through reinsurance with a small portion subject to being shared amongst the membership – a typical year does not see a risk share cost in excess of 5-10% of premiums paid.  Group Captives are contracted for Reinsurance through major carriers such as AIG, Hartford, Arch, Chubb, etc. 

Each member of a Group Captive is issued an insurance policy just as they would if they had purchased the coverage in the traditional insurance marketplace.  The policy is essentially the exact same in form and function from a coverage, claim, and audit perspective; and it is only on the backend where the financing is different.  From the outside looking in, the policy will look the same as a non-captive policy. 

Purchasing insurance in the traditional insurance marketplace is relatively simple, you get a quote, pay your down payment, sign your forms and you’re on your way.  However, joining a Group Captive is a bit more complicated.  Businesses applying for approval to join a Group captive must meet higher tolerances in terms of claims experience and risk control, while also having a strong financial background. 

If a member of a Group Captive decides to exit the program it requires a wind-down period.  Similar to the additional complexity to joining a Group Captive as compared to the traditional insurance marketplace, there is also additional complexity upon exit.  Each policy year is followed by a tail that lasts on average approx. 5-6 years before the coverage year is officially closed and all dividends are distributed.  Although it is not common for a member to leave, it does occasionally happen, although most often due to merger and acquisition activity.

Each Group Captive member has approx. 2/3 of their premium put into their own asset account within the Group Captive which is then used to pay claims.  The funds in the asset account are invested and all of the unused portion (including reserved claim dollars until the reserve is closed out or the amounts are actually paid).  The balance of the asset account is then returned in the form of a dividend – this includes both the unused funds and the investment return on those funds.  The timing and amounts of the dividends are up to the discretion of the Group Captive board, but all monies are eventually returned via a dividend. 

When taking into account the return of unused premiums on top of the typically already lower upfront premiums paid, businesses that join Group Captives can experience a material reduction in their risk management portfolio. 

Group Captive members gain direct control over their insurance costs as compared to the traditional insurance marketplace.  In the traditional marketplace, the best performing businesses remain challenged by rate increases from the claims experience of the overall insurance marketplace’s and due to the arbitrary and profit motives of individual insurance companies.  When compared to a Group Captive where a business that focuses on safety, compliance and reducing claims sees a direct and proportionate impact in both their premiums paid and the dividends received on the back end, for the Better and Best run operations the choice is clear.

One of the biggest complaints from businesses when it comes to their insurance and risk management programs is the lack of ability to budget and forecast costs.  In the traditional marketplace a business may see cost swings as much as 20-30% in a given year without having had a change to their overall claims experience.  This makes insurance premiums one of the most frustrating line items for many businesses to budget for. 

In contrast, members involved in Group Captives have better insight into their year-over-year premium changes due to their premiums being determined solely on their own actuarily analyzed experience.  With each member being given their own exact premium and getting regular claims reviews and financial updates, they are never surprised by an ensuing year’s premium charge.  Each year members know their exact minimum and maximum exposure, and when and how dividends and assessments are to be collected.

Every member of a Group Captive is also an owner, meaning they have the right to see and know where and how every dollar is spent.  And the Group Captive has the responsibility to provide the detail to the member on a regular basis.  This transparency includes such things as how claims are paid, management costs, and broker commissions. 

Members of Group Captives possess greater control over their claims, both in terms of management and in terms of payment.  Most Group Captives have a requirement where the individual member must approve claims over a certain amount – many times as low as $10,000.  In the end the dollars paid out in claims are those of the member and as such the member is given the strongest voice in the decision-making process. 

There are many types of Captives, from Single Parent to Group Captives.  To best determine if a Group Captive is the right choice for your business, it is best to know what other types are available. 

Typically used by very, very large businesses, Singe Parent captives are owned subsidiaries of their parent that are created and maintained for the sole purpose of managing the risk of the parent company.  The financial requirements to start and maintain a Single Parent captive are high and unattainable for most businesses.

A rent-a-captive is a company created by a third-party management firm to then allow companies with traditionally good claims and safety histories to rent/use the rent-a-captive for a charge.  Many times rent-a-captives are good alternatives to Single Parent captives for companies that lack or are not willing to utilize the financial resources necessary to create and maintain a Single Parent Captive. 

Self-Insured Groups are NOT a form of Captive, they are used to pool businesses together with the goal to reduce the overall cost for the members.  The issue with these groups is that they almost always require the members to agree to a joint and several liability agreements.  These agreements then require that each member is responsible for a proportion of the group losses, and then if/when other members are unable to pay their obligations then the members are required to pay the share of the losses for other members as well.  As compared to a Group Captive, a Self-Insured Group has a greater risk for members when it comes to unpaid claims by other members.