By: Josh Bicknell, Director of Captive Initiatives
When business owners navigate the many options available to cover risk and assets, they are often tasked with finding an innovative solution to protect their exposures. The traditional insurance marketplace can be an expensive venture, but there is opportunity to be found in alternative risk mechanisms.
One such opportunity has been gaining prominence over the last half century—the utilization of captive insurance, a strategic risk management tool that permits organizations to form their own insurance company. Single-parent captive insurance companies and group captive insurance companies, specifically, have become two significant insurance market changers. These entities allow their owners to customize coverage specific to their needs, all while gaining valuable control over their underwriting process and loss cycle. These structures also allow companies to capture underwriting income otherwise lost in the traditional markets.
GPW and Associates, Inc. (GPW) is an industry leader in single-parent and group captive insurance and provides best-in-class service tailored to the specific needs and goals of your company!
Understanding the Basics
Before analyzing the details of single-parent and group captive insurance companies, it is necessary to examine the basics of captive insurance.
Traditional insurance carriers utilize their actuaries and underwriters to develop policy premium levels, oftentimes with large income and expense margins built in. With a captive, you will partner with actuarial and underwriting teams chosen by you. With your team at your side, captive policy premiums are developed with reduced expense margins and your specific operations, exposures, and loss history in mind. At the end of the year, the captive is rewarded for minimal loss activity by retaining those policy underwriting profits. If those same coverages had been written in the commercial marketplace, profits would have ended up in the pockets of the commercial carriers rather than being retained in the captive.
In addition to capturing additional profit, the captive’s operations are transparent. Details around revenues, losses, and expenses are delineated in the captive financial statements. Business owners are able to dive deep into the details of their underwriting operations.
Single-Parent Captive Insurance Companies
Single-parent captive insurance companies are best suited for corporations with significant-to-moderate-sized operations. They ideally would have substantial risk exposure with ample risk distribution. These organizations have reached an economies-of-scale threshold and would benefit from a single-parent “pure” captive insurance company.
The established captive would cover the loss exposure only of the parent company and its affiliated entities. At this scale, a single-parent captive can provide greater control over risk management while achieving cost efficiencies.
In addition to providing financial benefits through the retention of underwriting profits, single-parent captives also can generate substantial passive income via investment earnings. Captive owners can invest the capital they earn. Investments can be handled in-house or with the use of a fund manager. (There are many money managers specializing in investment portfolios designed specifically for captives.)
With 100% ownership of the captive, one advantage to single-parent captives is the ability to design and establish insurance coverage specific to the needs of the parent company. This customization allows for a more precise alignment of insurance policies with the unique risk profile of the business, ensuring that coverage is comprehensive and relevant.
The establishment and management of single-parent captives require a considerable commitment. Upfront capital is required to create the captive, though, in many state domiciles, this capital can be in the form of a letter of credit. These entities must abide by state and federal statutes, remain aware of all regulatory submission deadlines, and ensure that their operations stay in line with the values of the parent company to be sure the captive is being utilized at its highest possible potential. These considerations underscore the importance of finding the right partners to navigate the process in the form of a captive management firm. Despite the challenges, many companies find the long-term benefits of single-parent captives well worth the investment.
Group Captive Insurance Companies
Some businesses will not meet the operational thresholds necessary to benefit from owning a single-parent captive. They might instead find a group captive insurance company is a better option. It is also common for owners of a single-parent captive to have ownership in a group captive insurance company, capturing the benefits of both risk management solutions.
Rather than having a single owner, group captive insurance companies involve multiple businesses coming together to share ownership. Shared ownership also means sharing the burden of expenses and the risk of paid losses. These captives more often attract small and mid-sized companies that may not have the resources to establish and manage a single-parent captive on their own.
The primary advantage of group captives is creating economies of scale for the pooling of resources, risks, and administrative costs among the participating members. Typical group risk management involves each member being responsible for their own losses up to a certain limit. If losses exceed said limit, they become shared among the full group. Owners have the benefit of self-insurance while also having the benefit of a safety net should any catastrophic losses occur. Groups can also establish investment portfolios to earn passive income.
There are outside-the-box advantages of group captives. Often, group captive ownership is comprised of organizations in a homogenous business industry. In other words, you’ll see the establishment of groups specific to manufacturing, distribution, or car dealerships. As a result, participants share experiences and common industry challenges to create a platform for collaborative risk management strategies. This often results in members collectively working toward more effective risk management, which benefits the entire group.
Similar considerations to single-parent captives also must be given in group captives, just at a smaller scale. Decisions related to underwriting policies, risk retention levels, and claims management must be made collaboratively. Effective communication within the group is key to its success.
Feasibility
We’ll leave you with the starting point in your journey to captive ownership: feasibility. To decide whether a captive is right for you, business owners should partner with a captive management and actuarial firm to have a feasibility study performed. This is where GPW comes in! GPW has been providing quality captive management and actuarial services since 1998 and is well versed in both single-parent and group captive insurance.
The feasibility study will consider the operations, exposures, and loss history of the company in making suggestions for the types of policies to consider and the level of premium and capital that will be necessary to support the program. The feasibility will also help explain the expected losses and potential volatility of the risks insured in the captive program. In addition to its usefulness, a feasibility study is also a requirement by all captive domiciles for the licensing of a single-parent or group captive.
Alternatives to traditional insurance are critical when deciding how best to cover the exposures of one’s business. Determining the appropriate levels of risk sharing, program control, policy customization, and resource allocation are key. As businesses consider the landscape of complex risk solutions, captive insurance will undoubtedly continue to be a vital option.
Contact a member of our team today to learn more about what captive insurance solutions are right for you!