Many companies that want to pool their risk together form captive insurance companies to underwrite risk within their groups, enabling them to control their costs.
The captive insurance company takes a portion of every loss, and when the losses are less than expected, members of the group get money back, giving them an opportunity to recover unused loss reserves, says Steven B. Bankes, managing director of Aon Insurance Managers Inc., Group Captive Solutions.
“A group captive is a blend between guaranteed cost insurance and a deductible program,” says Bankes. “It allows a middle-market business the opportunity to participate in its own insurance program. Then, rather than have that insurance program be an annual necessary expense, it becomes a profit center generating annual income for the company in the form of underwriting profit and investment income.”
Smart Business spoke with Bankes about how a group captive insurance company can help your business control costs.
How can businesses create or join a captive insurance company?
Usually they are invited into a captive, typically by a broker. Not all captives are open to new members, although many are. And businesses certainly can seek one out, working with their insurance adviser or risk consultant to find one that is a good fit in terms of their risk profile.
It’s important to find someone who can advise you on your options because there are different types of group captives. There is heterogeneous, in which group members come from different industries, and homogenous, in which group members come from a common industry. Some companies don’t want to be pooled with similar companies, some prefer it. For low- to medium-risk companies, heterogeneous is very common.
But both have proven to be successful, reliable, efficient risk-financing mechanisms.
How do captives work?
Generally, when a company joins a captive, it is leaving a very large pool of risk — the insurance market — to create a smaller, cleaner pool of risk. It’s like going from a public pool to a country club pool.
Once it enters into that smaller pool, it is incumbent upon the company to make sure it not only controls its losses but also invites other companies with a similar commitment to risk control to participate. It’s incumbent upon the company to make sure that its smaller risk pool stays clean, and the best way to do that is to control its own losses and ensure that everyone else coming in has that same commitment.
If the captive chooses to grow, it seeks out other members that share the same dedication to risk control. It’s very much like a club.
