Navigating Captives

SECTION 1

INTRODUCTION TO CAPTIVES

 

SECTION 2

CAPTIVE BASICS

 

SECTION 3

BENEFITS OF GROUP CAPTIVES

 

SECTION 4

TYPES OF CAPTIVES

 

SECTION 5

IS A CAPTIVE RIGHT FOR ME?

 

SECTION 6

HOW TO JOIN A CAPTIVE

 

SECTION 7

831(b) CAPTIVES

 

SECTION 8

HEALTH INSURANCE CAPTIVES

 

SECTION 9

TURNING PREMIUMS INTO PROFITS BOOK

BENEFITS OF GROUP CAPTIVES

 

 

TURNING PREMIUMS INTO PROFITS

 

In simple terms, a group captive is an insurance company created and wholly owned by multiple businesses to insure the risks of its member businesses. This beneficial structure is established to meet the risk-management needs of the owners or members.

The standard insurance market is based on the law of large numbers. Better run businesses with fewer claims subsidize those with more claims. Those “better” businesses, that are well-run and safety-focused, can qualify to come out of the standard market and insure themselves in a captive program where the collective risk is significantly lower than in the general insurance pool. Since these businesses will have fewer claims, they will earn lower premiums than they would in the traditional market. Over time, most members earn very significant premium reductions.

Your premiums are determined by actuaries based solely on your individual claims history, not by general industry averages or insurance companies. Remember, captive members typically have better claims histories than the industry average and therefore having premiums based solely on their history will result in lower costs. Since members in a captive typically improve their claims performance year after year, this compounding of lower claims every year can produce rates for you that are dramatically lower than the industry average.

Approximately 40% of your premiums will be used to cover the expenses of your captive program. This will include the fronting company fee, the reinsurance for your captive, the claims management costs, agent commission, as well as other captive operating costs.

This lower cost structure of a captive allows approximately 60% of your premium to be seeded into your Initial Loss Fund (see B in Captive Program diagram below), as shown in the diagram above.  If you do not completely use your Loss Fund, it will remain in your “account” for later distribution, potentially earning investment income.  Also, since those claims that do occur are not paid immediately, the required claim reserves will also be set aside and invested with any investment proceeds also going to your account.  As you can see, investment income is a significant way to help pay for potential claims as well as something to be returned to you later as a dividend.

As you can see, the combination of shrinking premiums and the return of underwriting profits to you translate into an overall dramatically reduced cost to insure a business as compared to the traditional insurance marketplace.

Still, businesses in a captive typically also receive the additional benefit from Greater Control over their Risk Management Program due to an excessive pricing, limited capacity, coverage that are unavailable in the "traditional" insurance market, and/or the desire for a more cost-efficient risk financing mechanism. They are able to achieve that control through improved cash-flow, transparency, the ability to customize coverage, improve claims handling and reporting, and stabilized budgets.

 

To learn more, please download a free copy of Turning Premium Into Profits.

 

Get in Touch

 

David Leng, CWCA,

CPCU, CIC, CBWA, CRM

724-863-3420 x 3329

dleng@duncangrp.com

 

John M. Duncan, Jr

CIC, CWCA

724-863-3420 x 3311

jduncan@duncangrp.com

 

 

© 2017 Premium Reduction Center, powered by Duncan Financial Group     •David Leng     •724-978-2139     •dleng@duncangrp.com