How Do You Determine If a Group Captive Is Right for You?
The term “captive” is becoming increasingly well-known among mid-sized business owners seeking to control their insurance costs. For some owners, a group captive might be the right solution; for others, it might not make the most financial sense.
In this article, I will walk you through the seven main variables to help guide you.
For a refresh on the basics of group captives, check out my first blog in this series, Group Captives 101.
Your Company Claims History is Better Than Average
One of the most important factors when entering a group captive is your company’s loss experience. Captive underwriters focus on your “loss pick,” which is your company’s projected annual losses based on past performance.
The loss pick is developed by analyzing your claims history over time, typically five to ten years, and adjusting for trends, severity and frequency. It represents what underwriters expect your losses to be going forward and is a key driver in determining whether a captive structure makes financial sense.
Your historical loss ratio also plays an important role in that analysis. As a benchmark, captive programs often look for companies with loss ratios around or below 40% compared to their industry peers. For example, if you had $1.5 million in claims over ten years and paid $5 million in premium, your loss ratio would be 30%.
However, even if a company technically meets that threshold, the loss pick ultimately determines fit. If projected losses are too high or volatile, the economics of a captive may not be favorable. In those cases, the standard market is often the more predictable and cost-effective option.
Your Claims are Relatively Predictable
Losses happen, which is why you purchase insurance in the first place. However, the frequency of claim submissions can be an important factor.
Group captives typically don’t penalize you for large “shock” losses. For example, your loss ratio is right on that 40% threshold, but you only had five claims over the last ten years. Four were small auto claims, and one was a large $1 million general liability claim. In this case, a captive may still make sense.
On the other hand, if you had $1 million in losses over ten years due to 50 claims, the standard market is likely your best bet.
In a group captive arrangement, you are responsible for your primary layer of smaller claims. Much of your catastrophic claims will be picked up through risk sharing with other members and reinsurance.
Frequency tends to lead to severity, and captive underwriters tend to view more small losses more negatively than shock claims.
You Pay Enough Premium
Group captives typically make sense once the combined premiums for General Liability, Workers’ Compensation, and Auto exceed $200,000. Certain groups allow minimum premiums starting at a combined $100,000, but they often don’t make sense compared to the standard market. The sweet spot is between $300,000 and $1 million+.
You Think Long-term
Captives are not built for short-term savings. They are a long-term strategy used to lower the cost of risk over a five-plus year period.
Between buying an equity stake in the captive, posting necessary collateral or letter of credit and your first-year premiums, the up-front investment can be significant. However, if you are a long-term strategic thinker and are confident that your business can keep claims activity stable, there is potential to capture hundreds of thousands to millions in long-term cost savings through dividends.
As explained in my previous post, it’s important to note that cash collateral, premiums and your equity stake in the captive don’t just sit under a mattress. They earn investment income and are returned in full should you ever leave the captive. They become your earnings, not the insurance company’s.
You Have a Healthy Balance Sheet
Since you would be required to buy equity in the captive and post collateral, you must be comfortable with tying up capital for multiple years.
In any given year, there is also potential to be assessed for additional premium if your frequency losses (A fund) are more than expected. However, the maximum assessment amount will be well-known prior to the policy year to allow for appropriate planning.
Having strong financials is not only a critical piece of the underwriting process, but it’s also key in determining whether a captive is a viable solution for your business.
You Are Invested in Your Company’s Safety Culture
If safety is a leadership priority rather than just an HR function, you already have the right mindset for a group captive. Effective safety culture starts at the top and is directly reflected in your claims history.
Upon entering a captive, you’ll gain access to some of the best safety resources in your industry; however, they only work if your culture supports them. I always ask, “Are you proud of your safety culture?” If the answer gets you excited, then you’re likely a great candidate.
You Are In a Target Industry
Captives are well-suited to many industries. Even if your business isn’t identified as a target industry on a marketing sheet, it’s always worth a conversation
Common industries include:
- construction
- manufacturing
- transportation/trucking
- oil & gas
- healthcare
- hospitality
- retail
- wholesale and many more
Group captives are designed for businesses with strong loss performance, financial stability, and a long-term approach to managing risk. If your company aligns with these characteristics, a captive can offer greater control, transparency and the potential for meaningful cost savings over time.
Take the Next Step to Join a Group Captive
If you’re interested in determining if a captive might be the right fit for your business, fill out our contact form to start a conversation.
About the Author
In his role at HWP, Jack acts as a commercial property & casualty risk advisor focusing on the Private Equity, Construction & Contracting and Commercial Real Estate sectors.
Prior to joining HWP, Jack spent 7 years at global insurer, Chubb. He most recently led the New York City-based Middle Market Private Equity Underwriting team.
Jack holds an Insurance Risk Management degree from the University of South Carolina and an MBA from New York University’s Stern School of Business. He is also a Chartered Property & Casualty Underwriter (CPCU). He is a current member of ABC Chesapeake Shores and the Association for Corporate Growth (ACG).
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