The term “captive” has been a buzzword in the risk management community for quite some time. Captives can provide a mechanism to better manage the risks within an organization’s construction operations, and contractors big and small often ask us to help them to better understand them. Let’s take a look at one of the fast-growing forms of captive insurance companies: the Group Captive.
What is a group captive?
A group captive is an insurance company that is wholly owned and managed by its insureds with a primary purpose of insuring the risks of its members.
The three pillars
Performance-based pricing
The membership sets the underwriting guidelines of the captive and decides what risks they are willing to insure. Premium rates are developed based on the actual claims experience of the members with greater emphasis on the member’s individual claims performance.
Transparency and control
Members of the captive benefit from full transparency of their premium spend and their claims outcomes. The member has full visibility into how every dollar of their premium is allocated and maintains greater control by providing more direction in the claims process.
Financial return
Underwriting profitability gets distributed back to the members in the form of dividends, rewarding superior claims performance and incentivizing members to prioritize risk management and safety within their organization.
What are some other advantages of group captives compared to the traditional insurance market?
Stability
While the traditional insurance market is cyclical in nature, members often find that the group captive structure provides greater long-term stability in terms of the rates, terms, and conditions that govern their insurance program.
Benchmarking
Contractors are inherently competitive. The controlled and transparent nature of a group captive provides a means to benchmark your organization’s risk management, safety, and claims performance against other contractors.
Knowledge sharing
Group captives provide a forum for contractors to share ideas, experiences, strategies, and lessons learned in a way that doesn’t jeopardize their unique value proposition. One of the common themes we hear from group captive members is that the peer group that develops within the captive members makes them a better, safer, more efficient organization.
The captive structure
Goals of the group captive
- Fund for expected losses
- Purchase reinsurance for catastrophic claims
- Each company pays for their own claims
- Minimize risk sharing
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