Why would an organization want to join a captive? That’s a great question, and the answer starts with understanding alternative risk management strategies outside those provided by traditional insurance programs.
In simple terms, captives are member-owned insurance companies operating for the members’ benefit. For business owners who want greater control over their casualty insurance program, a captive can be a good option. It involves sharing risks with others, blending services and expenses through a custom-built program that is best for each member as well as the group.
The top five frequently asked questions regarding captive membership are a good place to start exploring the possibilities of captive membership together. The questions are listed below along with answers provided by the AssuredPartners expert captives team.
- Why invest premiums into what may be described as a higher risk loss control strategy?
A captive solution supplies the same protection as a regular, guaranteed cost coverage plan, but it gives a business the opportunity to earn back 60 percent of their premium dollars. Therefore, a business that is financially stable with a strong safety culture and commitment to risk management can benefit from captive membership.
Additionally, captive membership means no surprises at renewal. Business owners are familiar with budgeting – forecasting expenses and planning reserves for anything unforeseen or unexpected in the coming year. Premiums are dependent on the previous year’s claims so a captive member knows what their premium expenditure will be each year.
Other business partners in the captive share the same program goals, commitment to success, financial stability and business ethic required for eligibility into the program. Therefore, the combined risk of the captive members is less than that of a traditional insurance pool.
- How are captive premiums formulated?
A company’s historical five-year loss experience and five-year premium history are used to determine the premium amount needed to support the potential claims for the upcoming program year. An actuary is used to run a loss pick based on the historical information required; no artificial rates are used.
- How do loss funds earn interest?
Sixty percent of an organization’s premium payment is invested in an interest-bearing account, earning investment income. Average investment interest in most captive manager equity accounts has been over six percent in the past 20 years.
- Is there a difference between a captive member insurance policy and a traditional insurance policy?
Captive members receive a guaranteed cost policy from a fronting company. This policy directly resembles a policy from a traditional carrier.
- Are there “hidden” risks in joining a captive?
There are no “unknown” risks involved with captive membership. Risk mitigation is built into the process in two ways: 1) Each member is responsible to supply an audited financial statement; and 2) an actuary is responsible to provide a loss picture that adequately protects members from assessment and insulates them from participation in risk sharing.
Another layer of security is the requirement of each member to hold a Letter of Credit (LOC) that makes certain premium is paid into the loss fund so protection is provided against any potential assessments.
Added safeguards include an end of year audit each program year to ensure the correct proportion of risk sharing is identified and equivalent to each member’s paid premium. Monthly reports are supplied that reflect each member’s loss experience to provide insight into potential risk sharing at the shared layer.
Together we examined the top five questions about captive membership, but that’s just the start. There is a range of opportunities available for businesses that are committed to controlling costs, managing risk, and building a strong safety culture as well as a host of other factors to think about.
We understand there’s so much to consider when exploring the possibilities of joining a captive – who to partner with, risk versus reward, financial structure – we are here to help guide you through the process as well as provide recommendations to help clarify your decision. Our team is committed to assisting you in making the best choices for your company. Contact us to talk to a team member about all your options. There is Power Through Partnership.