Group captives continue to be a viable alternative to traditional casualty insurance programs for construction firms across the country. Once reserved for firms with annual revenues more than $100 million, captives are now available to firms with annual revenues of $25 million – and in some circumstances less.
Homogenous groups offer general liability, auto liability, and workers’ compensation. The decision to join a group captive is multifaceted. Viability and feasibility analyses are recommended, if not required, and return on investment is best evaluated through an actuarial study.
Potential benefits of a group captive include:
- Ownership of investment income and underwriting profits.
- Reduced costs over the long-term.
- More control by playing a more active role in all facets of insurance operations: underwriting, claim handling and settlement, and investments.
- Peer group learning / sharing opportunities. You become part of a group of contractors interested in betting on themselves. Your group of fellow owners face similar risks and challenges daily and are motivated to manage proactively and improve.
- Association with likeminded and motivated construction firms to help enhance loss prevention, risk management, standards, protocols, and strategies.
- The opportunity to network with other contractors to address business and strategic risk facing the industry.
Participation in a group captive makes you an owner in an insurance company, and is not without risk. It requires a longer-term view of total cost of risk and an understanding of the captive’s operations. Some potential challenges include:
- Ownership not only of your risk, but also the risk of others in the group - depending on the captive’s structure.
- A greater risk of financial loss in the event members of the group experience workers’ compensation losses. There is more variability in results by possibly being required to participate in the poor loss experience of others with fewer participants to share risk.
- Exiting the group. If the risk becomes too great, there may be exit barriers. Simply put, it’s more difficult to leave a captive than to leave a traditional insurance program.
- A commitment of time and resources. Group captives demand involvement and participation from their owners. While most find positive outcomes from their participation, the demands on the management team must be considered.
- Concerns of confidentiality among members due to the underwriting process being more intrusive than the traditional insurance market.
- The possibility that specialty coverage or state specific policy forms may not be offered by the group captive and not easily obtained on a stand-alone basis outside the captive.
Like any business decision, the pros and cons must be explored. While a captive can result in greater control and potential profits, participation has risks you should thoroughly consider before making a final decision. When turning to a captive solution, it should never be a case of quickly deciding to run from problems within your traditional insurance, but rather an opportunity to evolve and grow as a strategic risk manager.