Insights

Group Captive Insurance Programs

July 15, 2015

Employee Benefits

Captive insurance programs trace their roots to the 1950s as an alternative form of risk financing in which the insurance company is owned by its policy holders. The type, size and complexity of Captives continue to grow and have become an increasingly popular means of risk transfer and financial control. The construction industry is reliant on insurance products and risk management for balance sheet protection, but the cyclical nature of insurance and catastrophic risks inherent in construction makes predictability in rates and coverages elusive at best. For the right contractor, captives can be a good alternative option in the search for a more stable means to transfer risk. However, despite their growing use, each Captive is different and if not carefully vetted prospective contractors could put themselves at considerable risk. Below are a series of recommended questions to ask, and elements of each captive to consider, when contemplating entering into a Group Captive program:

Are You a Captive Candidate?

  • Does your loss experience show strong control/predictability over claims?
  • Do you have an appetite to retain losses or otherwise have experience with large deductible/self-insured retention programs?
  • Can you support large collateral obligations and/or letters of credit?
  • Have you had discussions with your CPA regarding the tax and cash flow implications of a captive?
  • Are you committed to best in class practices around safety, risk management and contractual risk transfer?
  • Do you have an understanding of the joint & several responsibilities as a Captive Member

If your answers to some or all of the above questions are yes then it makes sense to have a discussion about your captive options. If you are interested in improving your risk profile, Woodruff Sawyer has the expertise and resources to build an action plan to get you captive ready. The commitment we make to our customers is always to educate them to make the right business decision based on their particular needs and risk profile, rather than sell a specific insurance product.

Critical Issues to Consider When Evaluating a Captive Questions for the Captive: Membership Profile & Criteria

  • What is the size disparity between members?
  • What is the profile of each member? Loss History? PremiumPaid to the captive?
  • What are the new member underwriting guidelines? Who gets in, who doesnt and who makes the decision?
  • What are the guidelines/criteria for existing members? Can members be asked to leave

Questions for the Captive: Administration & Program Specifics

  • What does the Captive do to help promote continued and improved safety, risk management and contractual risk transfer among its members?
  • What is the Retention amount of the Frequency Fund? Retention amount of the Severity Fund? Any separate Shared Loss Fund retention?
  • What is the reinsurance structure?
  • How much input will you have in the selection of new membersand the management (committee assignments) of the company?
  • Does the captive allow black ball authority so you can keep key business competitors out of your captive?
  • Is there full disclosure to members to identify all members losses (by Company name) as well as risk sharing losses?
  • Who are the service providers for the captive and who owns the service providers (i.e. claims administration, loss control/safety, reinsurance company, etc.)?
  • What is the expense structure, by line, of the captive?
  • Which insurance coverages will the Captive provide?

Questions for the Captive: General & Management

  • How long has the captive been in existence?
  • What is the industry makeup of the captive? Geographic spread?
  • What is the dividend history of the captive?
  • Have there been reinsurance recoverable issues in the past 5 years?
  • What is the loss ratio (incurred) of the excess of loss reinsurers of the program?

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