Captives have been a financial strategy for managing risk for decades. In the 1960s about 100 captives existed. Significant growth in this sector came in the 1970s as Bermuda became a leading captive domicile. Growth continued through the 1980s and 90s mostly due to the hard insurance market and increasing difficulty to find coverage for liability claims through traditional insurance.
What initially started as a funding option for larger organizations’ property and casualty coverage needs has more recently changed to become more amenable to all business sizes as well as a mechanism to cover new and emerging types of risks. The most recent growth trend includes captives as a tool for employee health population management.
What’s driving change?
Anyone who owns or operates a business of any size is looking for a hedge against the commercial insurance market price increases they are currently experiencing and want transparency in how their premium dollars are allocated. Another important consideration is awareness of new and emerging risks during a time of uncertainty and change.
- Increasing costs in the marketplace: Insurance at its most basic is a means to help assess, manage, and mitigate risk. Insurance consumers, i.e., businesses, pay premiums in exchange for protection against risk. Premium payments are calculated based on the risk level of the business or group covered. It follows that the higher the risk the higher the premium. For insurance carriers to be competitive, premiums are assessed at a level that matches the determined risk.
- Unknowns at renewal: Premiums are a substantial operating cost for an organization. A basic principle of insurance is that premiums paid by many cover the losses of the few. However, even a company with few claims can have a lofty increase if the insurance carrier’s insured pool experienced many losses. This makes budgeting for premium payments difficult.
- New and emerging risks: Uncertainty and change are words used daily. InsuranceJournal.com reported “10 Emerging Risks to Watch”. These include political risk – persistent pandemic problems, social media, and climate change; telemedicine – increased cyberattacks and professional liability claims; product liability – life science coverage and product liability; transportation concerns; entertainment – event cancellations and workforce woes; commercial real estate; management liability; employer liability; and nonprofits, which have unique business concerns that the pandemic exacerbated.
What’s the fix?
One way the captive insurance market is responding to these pressures is through an increased appetite for middle-market accounts. “We are seeing carriers expanding new captive business structures conducive to mid-market organizations. For example, 831(b) structures, because of tax code changes, and group captives with financially favorable entrance requirements are becoming increasing popular options,” states Lori Harris, AssuredPartners Captive Director.
The employee benefits sector is also seeing a rise in captives as a tool for managing costs. Every client has unique benefit program needs. Size (the number of covered employees) is not the most important factor when considering a captive option. Captives can provide cost containment approaches that mean there aren’t any unknowns at renewal. Captive members have access to their plan data and know where every penny of their premium dollar is spent. This allows the ability to initiate programs that target problem areas and divert large expenses.
Following are expert observations experienced in the property and casualty and employee benefit sectors.
For property and casualty coverage, the definition of middle market accounts can vary depending on who you ask. Don Dresser, Vice President, Commercial Solutions at Murray, defines it this way: “Mid-market sized companies are now considered those with $150,000 in premium on the property and casualty side, and that threshold is dropping as the captive market continues to develop.”
Employee benefits captives add a slightly different twist. Geoff Christian, Executive Vice President, Benefits Division, AssuredPartners, and recent addition to the Captives Vertical Team, has this to say: “Typically organizations with 50 to 250 employees covered on their medical plan are considered mid-market. However, due to current market forces and risk, captive programs are consistently looking at companies with larger numbers of covered employees.”
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.