“Sweet 16” Advantages of Joining a Group Captive Insurance Program

Insurance in its simplest form is the transfer of risk for a defined cost. The defined cost is what the business owner is willing to finance the transfer of risk for in the marketplace. The guaranteed cost market / traditional insurance market is certainly the most familiar model in the US for the commercial property and casualty marketplace. However, there are significant changes in the marketplace that have a large number of sophisticated and successful Policyholders concerned via this longtime popular approach. The below outline demonstrates just a few of these factors:

✓Predictive Modeling Analytics– A revolutionary way in which Insurance Carriers have harnessed the tool of artificial intelligence to evaluate, predict, price and renew commercial insurance policies. Advantageous to the Carrier in terms of actuarial analytics and price modeling. This is a disadvantage to the Policyholder in terms of their unique story, culture, components of safety/loss control programming, and overall intangible best in class deliverables.

✓RisingCommercial Fleet Auto Premiums– Business is booming in the Florida market and therefore there are now more miles being driven by a Policyholder’s employees. Couple this with the challenges with distracted driving accidents, rising medical costs and unemployment at an all-time 50-year low and you have a perfect storm for very aggressive litigation attorneys.

✓Industry Carrier Consolidation– Insurance Carriers are consolidating on a constant basis. Therefore, this changes insurance carrier’s historical business process of overall industry exposure appetite, underwriting, claims handling, renewal process, etc. is now radically changing. The issuance of insurance policy debit premium renewals and sobering policy non-renewals are now commonplace.

Therefore, a business owner is now faced with an entirely new set of circumstances in the risk transfer/risk management decision-making process. This may be an overwhelming situation for some; however, many prudent business Owners will understand the supply and demand side of the equation and consider what other alternatives are present in the insurance marketplace to consider. Enter the alternative risk financing option of a Group Captive Insurance Solution. Below are 16 advantages and risks of joining a group captive insurance program:

1. Transparency – The business Owner is now a Policyholder AND a Shareholder. Therefore, the captive fixed costs, loss fund pricing, and all other ownership advantages are now available to the business owner.
2. Partnership of 3– The guaranteed cost / traditional insurance industry has long been represented by insurance brokers on the distribution end of the spectrum. The group captive solution now provides a new transformative platform in place where the business Owner, Agency Advisor and Group Captive can work together in a “partnership of 3” and have the same alignment of interests to work towards the best interests of the Business Owner.
3. Control/ Flexibility– The business Owner is now privy to moving parts of the Group Captive since they are a shareholder and thus an abundance of controls and flexibility features are in place.
4. Stability– The reinsurance carrier is intimately involved with the Group Captive entity and therefore, there is stability in place because there is no predictive modeling in place only. There is more conventional / relationship underwriting in place that is beneficial to the Business Owner.
5. Rate/Loss Disparity– In the guaranteed cost / traditional insurance industry a Policyholder will pay insurance premiums based on its industry’s collective loss experience. However, the Group Captive now eliminates this mechanism and the rate for the Policyholder is now based on truly individual underwriting and all intangibles such as company culture, loss control/safety and longevity are valued.
6. Access to Reinsurance – The reinsurance carrier is now more accessible than ever. Again, this is an example of basic economic supply and demand as the guaranteed cost / traditional insurance solution is not in demand when a business owner has a relatively low loss ratio but the reality of sunk and rising premium costs.
7. Insurance Accounting & Premium Tax Deductibility – Due to the fact that the group captive is based offshore, there is no entity tax in place. Also, it is strategic vehicle to assist with family business succession planing issues.
8. Enhanced / Tailored Loss Prevention & Claims Management – A critical and robust focus on safety and loss control is vital in a group captive. Therefore, most group captives have a specialized component of these services via a Third-Party Administrator for Safety / Loss Prevention and also for Claims Management. Again, because there is transparency, control, and ownership in place there can now be a tailored or “open architecture” as they say for the most appropriate design of services for the business owner.
9. Tailored Litigation Defense – The tailored or “open architecture” design also extends to the litigation needs of the business owner. Local litigation representation is part and parcel to the structure of the Group Captive.
10. Underwriting Surplus – This is the tangible economic value of paying less in losses than that which was originally funded for the Group Captive. Therefore, the Policyholder / Shareholder will receive a distribution of these underwriting surplus dollars. The maximum potential of underwriting surplus is approximately 60-70% on an annual basis.
11. Investment Income – In a Group Captive the Finance Committee determines the extent to which the policyholder benefits from investment income on its loss reserves. Sometimes the Group Captive will provide a guaranteed rate of return; other times it might guarantee a range of rates within which the return might fall. The point is that if the organization is going to take advantage of off-balance sheet risk financing there are certain trade-offs, one of which is the amount of investment return.
12. Best in Class Sharing – Peer to peer opportunities for sharing is a normal and intentional trademark of Group Captives. There is an obvious incentive to work together, learn from one another and hold each member accountable to the highest of standards.
13. Networking – Along with best in class sharing, there is a parallel track of good faith networking that is also a natural feature of a Group Captive. Again, it is an inherent atmosphere of “esprit de corps” among members to engage and build solid relationships.
14. Renewal Confidence – Among many sophisticated and successful companies there can certainly exist an unpleasant renewal experience on an annual basis in the guaranteed cost / traditional insurance marketplace. A business owner will anxiously await the result of the renewal with often very little time to review and navigate industry options. However, a Group Captive renewal is completed months in advance with normally very little volatility.
15. Business Succession Advantages – Most Group Captive are structured with two forms of stock: preferred stock and common stock. Therefore, there are now opportunities to structure an effective succession income strategy.
16. Travel – Finally, there are board meetings that are held outside of the US due to captive compliance laws. Therefore, if a business owner does not mind traveling to Grand Cayman, Mexico, Canada, Ireland, Switzerland, and Iceland, perhaps this is another advantage of the Group Captive alternative risk financing model.

Jimmy Waller is the Founder and President of Center for Advancement of Family Enterprise Excellence, Inc. 501(c)(3) (CAFEE’). CAFEE’ is dedicated to the support, resourcing, and inspiration of America’s best family-owned businesses specifically in the industries of Construction, Manufacturing, Distribution, and Automotive.