Chapter 02
GROUP CAPTIVE BASICS
In simple terms, a group captive insurance company is an insurance company formed to insure only the risks of its member businesses. This creates a beneficial structure for certain businesses. Here’s how.
The standard insurance market is based on the law of averages. Better run businesses with fewer claims subsidize those with more claims. Captive insurance takes those “better” businesses out of the standard market and groups them together into their own insurance company. Since collectively these businesses have fewer claims, their premiums end up much lower than they were in the traditional market.
Read more about lower premiums and return of unused premiums: Captive Benefits.
Here are some additional details:
Captive Management
The group captive insurance company is managed by a captive management firm. About 40% of captive members’ premiums are used to cover the basic costs of running their insurance company, including claims management, loss control, policy issuance, and reinsurance.
Captive Board of Directors
All major decisions about the captive management are made by the captive board of directors which is made up exclusively of members of the captive. Each business that joins the captive becomes a captive member with one vote, regardless of their size, ensuring that decisions are made in the best interest of all members.
Risk Sharing and Reinsurance
The captive structure requires a small amount of risk sharing between members, typically less than 10%. The captive company covers all members’ claims up to a predetermined limit, typically $350,000 to $500,000. The captive contracts with a standard insurance carrier like AIG, Chubb, or Hartford to cover claims in excess of the set limit. This is considered reinsurance. Claims over the limit are covered by the reinsurance company. This structure protects the captive members from catastrophic claims.
Traditional Insurance Policy
The captive’s reinsurance provider issues insurance policies that appear exactly like any other standard insurance policy. No outside entity is able to identify that you are insured through a captive.
Joining and Leaving a Captive
Joining a group captive is more complicated than purchasing traditional insurance coverage because, as previously explained, members become owners of the captive company. Fortunately, for businesses that fit the ideal captive profile the rewards are significant. Nearly all companies accumulate hundreds of thousands of dollars in their asset account in just a few years. The process to join a captive is outlined in chapter six.
As with joining, leaving a group captive is also more complicated. It is recommended that businesses join a captive intending to stay a minimum of five years, as it typically takes that long for dividends distribution to begin. In reality, few businesses ever chose to leave a group captive. Since only businesses that have been pre-qualified to be the right fit are accepted in to the captive, virtually every business that joins reaps significant benefits, and therefore has no reason to exit.