Why best-in-class companies should consider joining a member-owned Group Captive insurance Company
Insurance expenses are usually some of the largest expenses for mid-sized business. If you have a large workforce, providing health insurance to employees is an important benefit but also a burden, with premium rates outpacing inflation and more than doubling over the last ten years. If your business operates in a hazardous industry, your Workers Compensation, General Liability and Auto Liability costs will also be significant and subject to insurance market fluctuations.
A problem with traditional insurance is that the better risks tend to subsidize the poor risks. The best run companies, with better than average insurance claims, do not get the full recognition for their risk management, as the insurance company depends on profits on those accounts to pay for losses on worse-than-average accounts.
“I encourage business owners and CFO’s to take a hard look at your claims experience compared to the premiums you pay. This will give you an idea of your potential savings opportunity”
I encourage business owners and CFO’s to take a hard look at your claims experience compared to the premiums you pay. This will give you an idea of your potential savings opportunity. For health insurance, this may be difficult because insurers do not share your claims data with you or provide limited data. However, if you are not aware of any ongoing large claims and your health insurance renewal rates are less than “trend” (i.e. 6- 9%), then it is safe to assume that your company is a very profitable account to your insurer.
Likewise, look at your loss ratio on your Workers compensation, General Liability and Auto insurance. You insurance agent/broker has this information and can provide for you. If your losses over the last 3-5 years are less than 50%, then you have been a very profitable account to your insurer.
How can you reclaim those profits? One way to turn those premiums into profits is to join a member-owned Group Captive Insurance Company. These captives have been around for years and you will probably find that many of the best-managed companies in your industry are already captive members.
A group captive is an insurance company formed to insure the risks of its members. Your insurance dollars are allocated into two buckets: operating costs + loss funds. Operating costs are low for these entities, and all unused loss funds are paid out to members as dividends along with investment income.
Once you are in a captive, you have a strong incentive to avoid & manage claims because all of the savings goes directly to your company!
Group Captives are able to manage your risk exposure by purchasing reinsurance for larger losses and capping your maximum exposure at an acceptable level.
There is a relatively low initial cost of joining a member-owned group captive, and you may have to put up some collateral to cover your maximum exposure. However, joining a captive is a decision for the long-term, and an approach which will give you much more control and the opportunity to drive down your cost over time.
If you are interested in learning more, I can help you determine whether this is a “fit” for your business and go over all of the advantages and disadvantages of this strategy with you.
Ed Kushlis, CPA, CPCU
Captive Insurance Specialist