Many businesses face challenges when dealing with their risk management needs. Increasing costs of insurance premiums based on market trends, coupled with a lack of control over your insurance program, may increase frustration at renewal time for your company. As a result, some businesses have considered alternatives to traditional insurance programs. Group captive insurance programs can be an attractive solution and have become increasingly popular over the last few years.
A group captive insurance program is an insurance company that provides insurance to, and is controlled by, its owners. Several businesses join together to participate in ownership and share risk for commercial insurance coverage in areas such as worker compensation, commercial general liability and automobile liability/physical damage. Typically, these companies operate in similar industries, have an entrepreneurial vision and have a favorable history of insurance losses.
Under traditional insurance programs, premium costs are generally dictated by unpredictable market conditions and industry averages. In a group captive insurance program, members pay premiums based on their own individual loss experience, calculated actuarially, and the premiums tend to be more stable from year to year. In addition, members retain their individual unused loss funds and the investment income associated with those loss funds. Typically, these unused member premiums are returned to each member after the captive’s management determines that all claims for a respective year have been resolved. In some cases, a group captive may elect to obtain reinsurance coverage on outstanding claims to accelerate the return of unused premiums. Overall, this generally reduces costs and improves cash flow for the member companies.
Another benefit of group captive insurance program participation involves the claim management process. Under traditional insurance programs, the management and resolution of claims are controlled entirely by the insurance company. Captives partner with a third- party administrator to manage claims. This approach tends to provide more control over claims handling and the claims settlement process by the captive participants, because they select the claims management partners.
Member-owners in a group captive tend to be companies that focus on enhancing their risk management programs, demonstrate strong controls for safety and claims management and minimize the overall insurance premium costs while achieving a return on their investment. The owners in a captive approve the admittance of new members, hand- selecting interested companies based on better-than-average loss performance. This results in a captive whose members tend to be well-run both financially and in risk management. There is a tremendous value in being able to network with other member- owners and share ideas regarding loss prevention and other general business matters.
In summary, group captive insurance programs continue to provide an attractive alternative to traditional insurance programs. They can offer a significant value by reducing overall costs of insurance, providing ownership and return on investment, giving more control over the claims management process and providing a forum to exchange ideas with other successful business owners. Business owners who have an entrepreneurial attitude, a commitment to controlling costs, financial stability and a solid safety culture should consider participation in a group captive insurance program. With a volatile and cyclical commercial insurance market, now may be the time to consider change to a captive program.
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