Mitigating and managing risk are essential components of any business. The most straightforward risk management tool is one we're all familiar with: insurance. Purchasing traditional insurance coverage can be a major headache for any firm, let alone firms in the construction industry. With needs ranging from general and umbrella to worker's compensation, auto liability, and professional liability, insurance can, at times, become overwhelming. A captive insurance arrangement can be an attractive supplement to traditional insurance for many contractors.
Insurance captives have been popular among larger contractors for a number of years. However, many mid-size firms have been joining the trend as of late. A typical insurance captive arrangement involves a number of contractors coming together to form their own insurance company. This type of "group captive" insurance arrangement is most commonly used for frequent occurrence types of risks - as opposed to infrequent risks - although there is growing application of captive insurance for the latter types of risks as well.
An advantage of a group insurance captive is that it is partially owned by a number of unrelated member contractors, with everyone sharing, to some degree, the collective risks of the group as well as participating in investment earnings and premiums paid in excess of claims. Captives are designed to generate long-term profits for their participants when covered risks are managed effectively by the members. The ultimate cost of risk coverage can therefore be much lower for contractors participating in a captive as opposed to purchasing traditional insurance. Premium costs can also be easier to control since a member's loss history play a more important role than the overall construction industry group experience in a traditional insurance product.
Finally, one often overlooked advantage of group captive insurance companies may be the greatest risk management tool of all. In a group captive, the member firms are all committed to minimizing risk. As such, many captives will implement initiatives such as on-site compliance audits and risk management training and education for employees of the member firms in an effort to prevent or reduce claims. In addition, due to the small number of members within a captive, the company itself can be much more responsive to the needs of the member firms than a traditional insurance company.
Even with their many advantages, insurance captives are not for every contractor. There are certain requirements for entering an insurance captive that may not suit every contractor. Primarily, it is important to have an impressive safety record and loss history, as this will help keep premium costs low for all members. Additionally, there are fairly substantial premium costs for entering an insurance captive. This is a factor that needs to be considered for your company. Ultimately, the unique facts and circumstances present for your company need to be reviewed and evaluated in deciding whether this makes sense for your business.
We will be happy to provide further information relating to this subject. For more information, contact Mark A. Guillaume, Director, Audit & Accounting and Construction Industry Group Co-Leader at Email or 215.441.4600.
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