What benefits are there to joining a captive versus buying traditional insurance?
Captives are simply insurance companies that have been dismantled and their components made transparent to the buyer.
An insurance contract is the offer to accept and pool risks from a large group of participants and to follow the fortunes of that risk pool for a charge in the form of an annual premium. The insurance contract includes such services as claim adjudication, loss control, reinsurance and premium tax payments, and within the total cost is the insurance company’s profit margin. The fee for these bundled services is set in the annual premium whether the insured makes full use of them or not.
A captive, however, has the ability to pick and choose only those services it wishes to buy and carefully scrutinizes from whom they buy them. Most importantly, it self-selects the pool of risks. While the traditional insurance market has a larger risk pool to draw from, captives deal with smaller, likely cleaner risk pools and offer only those products and services that directly benefit the parent or group — with the underwriting profit of the insurance carrier mostly stripped out.
What are the trade-offs?
Captives require increased participation in their insurance programs more fully than traditional insurance risk transfer. Captives can expect positive peer pressure from their parent or other group captive members to control their losses and comply with loss control recommendations. Also, instead of a 30- to 60-day renewal cycle flurry of activity, captives require ongoing scrutiny of loss reserves, quarterly financials and an annual meeting. Most fundamentally, an insurance premium is a static cost negotiated annually. The cost of a captive is tied to the performance of the risk control and claim management of the company. While captives can return underwriting profit, they can also result in an assessment in response to poor results. To secure this potential assessment, captives often require some amount of additional collateral.
Why would I want to get into the insurance business when that isn’t even close to my company’s mission?
Every company needs to stick with their strengths, but participating in the active management of your retained risk via the use of a captive falls within your core competency.
Some companies are better than others when it comes to safety. Your captive manager will run the day-to-day operation of the captive, but as a captive participant, your job is to do what you are already doing: controlling costs and keeping your employees and the public safe from harm.
Scott N. Saunders, ARM, is a vice president and senior account executive in the Pittsburgh office of Aon Risk Services Central, Inc. Reach him at (412) 594-7583 or [email protected].