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Captive Insurance Explained
Definition of Group Captive Insurance
Group Captive Insurance companies are owned and managed by the Policyholders. Policyholder-Owners are primarily responsible for predictable losses, share the exposure to larger, unpredictable losses with other members of the Group Captive, and transfer the risk of catastrophic losses to a reinsurer. Policyholder-Owners gain control of their insurance destiny and receive 100% of their underwriting profits and 100% of their investment income. In summary, a Group Captive is a reinsurance company that is owned and controlled by its policy holders.
Underlying Principles of Group Captive Risk Management
Retention: Risk managers agree that retaining predictable risk is a more cost effective tool for corporations than “trading dollars” with insurance underwriters. A Group Captive reinsurer enables each owner to enjoy the benefits of risk retention without fundamentally altering their risk profile.
Transfer: Responsibility for catastrophic losses is ceded to the Group Captive’s Specific Excess Loss Reinsurer. The Group Captive is further protected by aggregate insurance coverage provided by its Program Insurance Carrier. The program insurance carrier is a “A” or better domestic insurance company admitted in all fifty states.
Prevention: Prevention of loss is an extremely important part of any risk management program that involves retention. A well-designed Group Captive program places a strong emphasis on loss prevention and provides a strong incentive to eliminate or substantially reduce a corporations exposure to loss.
Claims Management: If a loss does occur, the ability for a business to have a meaningful “voice” in the claims adjudication process is necessary and vital for a successful resolution. Group Captive Policyholder-Owners enjoy a level of service and control that is consistent with their ownership position.
Limitations of the Traditional Insurance Model
Traditional business insurance is designed to create profits for conventional insurance company shareholders — not policyholders.
Premiums are based on standardized rates, not the actuarial loss experience of a policyholder.
Insurance companies retain 100% of the investment income value of their premiums. Policyholders provide the financing.
Operating Expenses of insurance companies include many costs that do not benefit, or are unrelated to, the interests of policyholders.
Services to policyholders are bundled together from a single source to create cost inefficiencies and to mask lack of expertise in certain industries.
The primary goal of insurance is to provide stability and predictability to a corporation’s cost of risk management. The cyclical nature of traditional insurance delivers exactly the opposite.
Group Captive Structure
The INSURED becomes an owner of the Captive, sharing risks and expertise with other members who have similar issues, philosophies and levels of commitment to the highest risk prevention standards.
As an independent broker, ROSENFELD EINSTEIN works with
the Insured to identify the most appropriate Captive Reinsurer, is responsible for the coordination of the Insured’s portfolio of coverages and provides risk advisory services.
The SPECIFIC EXCESS INSURER is ceded catastrophic losses, on a per occurrence basis, that the Policyholder-Owned Captive is not willing to retain. It receives a premium for its participation and pays all claims in this layer.
CLAIMS ADMINISTRATOR provides claim adjudication management services on a nationwide basis.
CAPTIVE MANAGER is the primary consultant to the Board of Directors and is responsible for the implementation of all Board decisions. The Board is comprised solely of Captive Policyholder-Owners.
The INSURANCE CARRIER issues the policies that insure the shareholders of the Captive. In addition to satisfying regulatory compliance issues and maintaining an “A” rating or better, the Insurance Carrier provides the Captive with aggregate insurance protection.
Group Captive Funding
Each member’s five-year loss history data is collected, trended and developed by an independent actuarial firm. The actuary estimates the Policyholder-Owner’s frequency losses (typically claims less than $100,000) and this amount becomes the insured’s “A” Fund.
Next determined is the amount that should be allocated to the insured’s “B” Fund. The “B” Fund contributes to the remainder of the Captive’s per occurrence retention limit.
The Policyholder-Owner’s premium for the year is the sum of the “A” Fund plus the “B” Fund plus Operating Expenses. All Operating Expenses are approved by, and are transparent to, the Ownership.
An insured has a potential maximum exposure of one additional “A” Fund for a given underwriting year. Any “A” Fund assessments are paid by the member over a subsequent three year period and this potential liability is secured by a letter of credit.
Choosing the Most Appropriate Group Captive for Your Company
Group Captive insurance companies vary in size, scope and function. The Group Captive manager oversees the administration and proper functioning of all the independent contractors (the broker, the fronting company, reinsurer, etc.) as the direct consultant to the captive company and its shareholders. The data you should collect in order to make the best decision includes:
Group Captive Management Track Record and Expertise
- Captive Manager
- Specific Excess Reinsurer
- Actuarial Firm
- Claims Administrator
- Loss Prevention Services
- Program Insurance Carrier
Attributes Shared by the Best Candidates for Group Captive Insurance
The decision to join a Group Captive is a serious one that must align well with your corporation’s strategic goals and values. The characteristics of forward-thinking candidates who are positioned for the long-range benefits of a Group Captive include:
Management Commitment to Safety and Claims Management
Loss Experience Better Than Average for Industry Group
Regular Attendance and Participation in Board Meetings
Business Philosophy Compatible with Existing Policyholder-Owners
Ability to Meet Minimum Annual Casualty Premium Level (Typically $150,000)
Preliminary Data Submitted, including:
- 5-year loss history
- 5-year exposure history
- Copies of current policies
- Existing company brochures
- Current financial statements
Loss Forecast Conducted by Independent Actuary
Cost Projection Presented
Membership Approval Process Completed
Capitalization Check Received
Stock Certificate Issued