Traditionally, when people think of captive insurance companies, they think first of `single parent' structures, in which a captive insures or reinsures the risks of its parent or affiliates. But more and more businesses are now discovering the benefits of the group or association captive marketplace. Should you?
If you or your clients are currently paying upwards of $150,000 per year for a combination of workers' compensation, auto and product liability, have a strong emphasis on safety and loss control, and operate a financially sound company, then a member-owned or `group' structure may well make financial sense for you or your clients.
Group captives can also be used successfully for property, professional liability and other programmes with various premium thresholds. Single parent captive structures normally look for annual premiums in excess of $1m to balance the cost benefit equation, but by pooling together a number of like-minded companies into a `group' entity, the primary captive advantage of controlling your insurance destiny can be opened up to middle-market companies who would otherwise not qualify.
Another question is: if your premiums are greater than $1 million, are you precluded from `group' captive involvement? Certainly not, as the many benefits are available to insureds of all sizes and backgrounds.
`Group' structures can take several forms, from an entity owned by unrelated businesses in a variety of industries (heterogeneous), or in the same industry (homogeneous), to entities sponsored by brokers for the benefit of some of their clients, or to entities promoted and owned in part or all by an association for the benefit of its members, or some combination thereof.
So how do you go about finding out about a group captive? Your broker may well know of some group captives; your golfing partner or other industry colleagues may already be in a captive; or you can contact the various professionals in the industry, including the author, who can guide you through your due diligence efforts. One of the premier consultants in the member-owned group captive marketplace is Captive Resources LLC (a sister company to Kensington Management Group Ltd), which is the recognised leader in the establishment and ongoing guidance to group programmes throughout the US for almost 20 years. They can be contacted at
Depending on your particular industry and situation, joining an existing structure may be the preferred option, or alternatively, together with a group of at least 10 or more like-minded companies, you may wish to set up your own. Either way, you will be taking the first steps towards controlling your insurance destiny.
At Kensington Management Group Ltd, one of the largest independent manager in the Cayman Islands, we work with groups ranging in size from 15 members to more than 400, and from newly-formed to one approaching its 20th anniversary. In all cases, regardless of the size of the programme, members benefit from numerous advantages, some of which are: loss control/risk prevention programmes - all good group programmes place great emphasis on loss control and risk prevention, and encourage the involvement of management at the highest level, rather than just the safety personnel, so that the safety culture permeates throughout the entire organisation. They will often sponsor safety seminars for member companies, incorporating success stories from actual members, as well as bringing in safety experts to focus on topics relevant to the members' industries, thereby making them more relevant and productive; group purchasing/volume discounts - instead of being a relatively small pawn in the traditional marketplace, you can become part of a larger player, with the buying power of $10m, $30m, or even $100 m in annualised premium. Not only does this enable the captive to negotiate more preferential rates, it also ensures that the `fronting' and reinsurance markets continue to show interest, even in today's hard market. A further benefit of being part of a group is the ability to negotiate discounts with suppliers common to the members, for items such as safety equipment and videos, employee screening aids and specialist training; tax deductibility - if the group programme is correctly structured, incorporating, amongst others, an appropriate level of potential for risk sharing, then it should qualify as `true' insurance and thereby enable the participants to take a full deduction for their gross premiums. Obviously, different structures and individual circumstances can impact this ability, and the necessary tax advice should be sought; sharing of fixed costs - the direct `insurance'-related expenses of the captive will obviously vary relative to the premium of each participant, but other fixed costs, such as license fees, audit and management fees, actuarial fees, bank charges and meeting expenses, are unlikely to increase at the same rate, and accordingly can soon become a relatively immaterial sum when shared amongst the participants; loss rated premiums - being outside of the `traditional' insurance marketplace enables captives to customise their premium structures (within the realms of actuarial guidelines and regulatory approvals). A fairly common approach in this area is to start a member's premium calculation based on its own loss history, rather than just industry averages. Accordingly, companies with better than average loss histories can benefit quite significantly from this approach. Further, by implementing good safety and loss control procedures, companies can even grow their exposures considerably over time, but find that their premiums have remained constant, or at least not increased at the same rate.
By linking premiums to members' own losses, and utilising the buying power of the captive as a whole, the individual members can be insulated (but not immunised) from the fluctuations of the insurance marketplace, thereby further satisfying the goal of controlling your insurance destiny; investment income - given the current performance of most investment markets, investment income may need to be reclassified as a fixed cost. However, the application of prudent and conservative investment management to the surplus funds of the captive should, over time, contribute significant sums to the bottom line of the captive, and accordingly to the potential dividends or distributions accrued to each shareholder; networking/pooled idea sharing - not only do we see group captive members sharing success stories from a safety perspective, but also long term partnerships are established with true networking of business ideas. We also see business collaborations being established outside of the captives, and many friendships being forged and renewed at each captive meeting and in between. Additionally, the entrepreneurial spirit of the member companies means that group captives are often at the forefront of new initiatives and ideas, with the members being the first to benefit; service providers/specialists - group captives do pose special challenges to the service providers involved, whether it be the broker, `front', TPA, actuary or consultant. However, most, if not all of these providers have established the necessary capabilities to service this growing segment of the market, often through the formation of specialist departments. This ensures that member companies receive the personalised service that they require, and this is further strengthened by the size of the captive's relationship with the provider, which ensures that the necessary leverage can be brought to bear in order to maintain service quality; collateral/capital - setting up a single parent captive can involve a considerable capital commitment, but membership in a group programme usually involves a much less significant sum. In addition to the share capital investment, most programmes require a collateral deposit (in cash or letter of credit) linked to the level of premium being written. This collateral not only supports the premium-to-surplus ratio, but also provides collateral for the outgoing letter of credit to the `fronting' carrier, as well as `sleep' insurance to the other members that each member will meet their financial obligations to the group. dividends/distribution - at the end of the day, while the primary goal of joining or establishing a captive is to have the ability to exert some degree of control over one's costs, another main benefit is the ability to potentially receive distributions or dividends representing the return of unutilised loss funding and (hopefully!) the investment income thereon. Different programme structures will dictate the timing and potential for returns, as well as the format they may take - policyholder distributions, retropremium credits or shareholder dividends - but it should be noted that the latter probably offers more flexibility through the use of different classes of shares, and the potential for different and partial ownership; accounting and administration - the offshore management of group captives offers specific challenges, especially in the accounting, administrative and regulatory approval areas. Customised accounting and reporting software is a must to track each member's premium and loss activity in each underwriting year, together with agreed upon risk sharing and assessability formulae pre-programmed. It is therefore imperative that you look to a manager that has proven expertise in this area, such as Kensington, which has over 1,400 entities and $400m of annualised premium in its group captive portfolio, as well as its single parent captive portfolio.
Michael W B Gibbs
Michael W B Gibbs FCA is president of Kensington Management Group Ltd, and chairman of the Cayman Insurance Managers Association.