With companies looking to find adequate coverage for costly and difficult snow and ice management operations, captive insurance has become a hot topic. In its modern format, captive insurance dates back to the late 1950s, when poor market conditions led to increasing premiums, higher deductibles and tighter policy conditions, prompting several large companies to form singleparent captives. At the time, the captive insurance model was only financially viable for larger companies with significant capital. Today, with the formation of group programs, captive insurance has become commonplace among all types of businesses.

We’re going to take a look at what a captive insurance program entails and how it may benefit your overall risk management program.

Who's a good fit?

Group captive insurance programs can benefit mid- to large-size companies that pay at least $150,000 in commercial insurance premiums per year, have historically low losses, and are financially sound.

Group captive insurance is most often used for standard casualty lines like general liability, commercial auto and workers’ compensation. The point of a captive is not to retain all risks. Group captive members still transfer some risk to conventional commercial insurers.

Captive audience

Here are some of the main advantages of joining a member-owned group captive:

1. Reduced insurance costs. Traditional insurers typically develop premiums based on industry averages and state rates, leading to pricing that doesn’t reflect your company’s actual loss experience. The member-owned group captives we work with will use your actual 5-year loss history to determine your company’s premium. Furthermore, a continual focus on risk control and safety within the captive will empower you to better control losses and lower your premiums over time.

In addition, commercial insurance carriers spend significant sums on marketing and acquisition, commissions, administration and overhead — costs that are passed along to you. This cost structure is specifically designed to deliver profit to the insurer’s bottom line. By contrast, group captives minimize operational costs by unbundling services and reducing overhead; and as an owner, the savings go straight back to your bottom line.

2. Insulation from market fluctuations. Conventional commercial insurance is vulnerable to market fluctuations. As the market hardens, premiums rise, coverage tightens and insureds pay the price. As a group captive member and insurance company owner, you’ll be less susceptible to the ever-increasing and unpredictable costs imposed by conventional insurers year after year. A group captive provides its member owners the ability to smooth the cyclical volatility of the commercial insurance market – extremely important in the snow and ice management industry!

3. Improved risk control and safety. Risk management and safety are cornerstones of group captives. To help members improve their risk control methods and better understand the factors that commonly lead to losses, the captives devote a significant portion of every premium dollar to loss prevention. As a result, a wealth of resources is available to member companies to support their continuous improvement.

4. Enhanced profit potential. Safety pays for group captive members. When member companies increase safety and reduce losses, their unused loss funds and the accrued investment income on those funds are returned to them in the form of dividends. Members also earn investment income on capital and cash collateral.

5. Increased control over claims management. Most companies insured in the traditional market have little involvement in how their claims are managed and adjudicated. As a member owner in a group captive, your company will be allowed and encouraged to be more actively involved in claims administration. From access to adjuster’s information, regularly scheduled claims reviews, development of complex claim strategies, and involvement in the selection of counsel, it’s a process that focuses on driving claims to closure and lowering costs.

Lowering the cost of risk

For companies willing to invest the effort to proactively manage their risks, group captives offer a compelling way to lower their total cost of risk (including insurance costs):

Premiums are based on your experience. Underwriters in the traditional market utilize pricing models that include multiple factors totally unrelated to the exposure your company presents. These factors include expected investment returns, underlying profitability of their book of business, and industry rates. In contrast, member-owned group captives determine your premiums based on your company’s actual loss experience and exposures to provide you with the price you deserve.

Great companies become even better. The group captives we work with attract best-in-class companies and then strive to make them even safer. So, rather than sharing risk with a pool of unqualified insureds, you know you’re in the good company of other like-minded, successful business owners who are committed to continual improvement.

What to expect during a captive review

If you decide to pursue a group captive, here is what to expect in the review process. The insurance broker works with the group captive and the captive manager, taking a deep dive into your company’s background, loss history and financial stability. More specifically, the captive will review:

• Claims history - The captive needs to ensure that your company has a low number of claims and will look at five years of recent claims history.
• Insurance policies - The captive manager will review all current policies to ensure the coverage will be matched under the group captive.
• Financials - Company financials will be reviewed to analyze your company’s financial health. Income statements, balance sheets and statements of cash flow, among other statements, will be requested to determine the financial strength of your company.
• Premiums, payroll & sales history - Five years of this data will be reviewed and used for actuarial pricing, which is used to develop premiums that will cover loss based on risk probability. The review of this information will determine if your company is a good fit for the captive.

The review and qualification process can take some time, depending on the underwriting requirements of the group you choose. You may need time as well to learn and understand the group captive product. Be prepared and remember that this small investment in time can pay off by providing you the opportunity to have better control over your insurance, including paying lower net insurance premiums and the opportunity for dividends and investment income.

Captive acceptance - Once the review and analysis are complete, your insurance broker and the captive manager present a proposal for the premium amount and claims fund deposit that protects the members of the captive. Once you accept, the final underwriting is completed. Coverage begins when you accept the terms and make your first payment.

First-hand perspective on captives

The reason we made the leap into captive insurance was the fickle nature of the traditional insurance market. With a traditional insurance carrier, it doesn’t matter how well you perform or what you are doing to better your results; if they suffer bad losses or lose interest in the line of business, you are out on your ear. That happened to us more than once in the last decade; and it threatened the long-term viability of our business.

The captive decision-making process is complex; but what I have found talking to many peers who have reached out to me for insight is that they are blinded by the potential returns which, while awesome, were not the main factor in our decision.

Being able to acquire insurance annually and have faith in relatively stable rates has far more value to Elbers in the long run. Any returns we may see in the coming years are icing on the cake and will only make our company stronger.

— Jim Hornung Jr., CSP, president, Elbers Landscape Service

Brian Duffett is Captive Services Executive for Lawley Insurance. Contact him at bduffett@lawleyinsurance.com or 716-849-4338. Lawley Insurance is an independent insurance agency that specializes in property and casualty insurance, employee benefits and risk management consulting.