Inside Group Captives

A captive insurance company is wholly owned and controlled by the insured and designed to insure the risks of its owner. The are many different types of captives, including a Single-Parent Captives, which have one owner, and Group Captives, which are formed by a group of individuals or entities. Group Captives are best suited for middle market firms and some large businesses looking to take advantage of all the benefits of a Single Captive but are unable to meet certain guidelines needed to be considered an insurance company for tax reasons or don’t have sufficient premium volume to assume a portion of their risk.

Group Captives can be homogeneous or heterogeneous, with homogeneous captives formed by companies in the same industry (sometimes called a “industrial group captive”). Heterogeneous plans are for businesses from a wide variety of industries coming together to share the risk, cost and benefits of providing commercial insurance to their members. 

The reasons behind forming a Group Captive are similar to Single-Owner Captives, including leveraging the benefits of pricing stability, insurance coverage stability and improved services. There are other benefits, too, including:

  • Improved loss forecasting and greater risk retention potential: Overall claims experience can be better predicted given the law of large numbers with a Group Captive than when you’re covering the exposures of a single organization. The reduced variation in loss levels enables a Group Captive to assume greater retentions, which typically results in lowering the costs of insuring the group’s risk over the long haul.
  • Mass purchasing power: Group Captives are able to get services and reinsurance more cost effectively than that of each individual member.
  • Lower overhead: Because of the economies of scale, overall management of the group captive is reduced.
  • More responsive to tailored coverage for high-risk industries: With a Group Captive, high-risk industries or professions (such as physicians) can obtain insurance coverage specifically tailored to their needs.
  • Greater loss control emphasis: Members of a Group Captive share in the losses, therefore there is greater incentive to implement and enforce risk management and safety practices to minimize and control claims frequency. In some domiciles, such as in Tennessee, captives are allowed to use a Protected Cell Company (PCC) structure whereby each participant’s assets and liabilities remain separate, with no risk sharing and no exposure to creditors of other participants. The participants still have access to the specialized loss control and other services that Group Captives enjoy, but they do not have to worry about the negative impact of another participant’s poor experience. Retention and
  • Cost-effective return of profits: Group Captives typically pay dividends or otherwise distribute underwriting profits and interest to their owners or insureds. Depending upon how the captive program has been set up, the Group Captive can be financially advantageous, as compared to a non-insurance risk retention program or commercial insurance.

As with anything, there are certain disadvantages to a Group Captive that should be considered including the fact that not all members may have the same coverage needs, based on geographic concerns, varying sizes, ownership structures or operational differences within the same industry. Other issues to consider include potential formation/capitalization delays, reaching consensus among members over operational issues, rating and cost allocation differences, distribution of underwriting profits, reduced degree of confidentiality among captive members, additional management time in overseeing the captive, and potential participant withdrawal, among others.

When assessing if a Group Captive is right for a client, be sure to look at the following: who controls the facility and whether there are any potential conflicts of interest; what is the minimum required participation time in the Group; how are premiums determined; what type of risk control efforts does the facility require of its participants; and the provisions for the withdrawal of participants and the entry of new participants.


Source: IRMI