Almost every business leader has felt it: the sense of no control as your insurance premiums seem to skyrocket. Whether it is your commercial insurance program or your employee benefits package, it often appears there is little you can do to avoid these annual price increases. This is because the guaranteed cost insurance solution is priced based on marketplace volatility. Your business cannot control the onset of a global pandemic, an increase in weather-related disasters, or the spiking trend in plaintiff-friendly legal decisions. Yet carrier-based insurance programs must spread their losses across all insureds in an effort to minimize the impact on their loss prone clients. Essentially, the strong performing clients pay for the poor performance of their peers.
Captive programs are one way to combat this type of market-based insurance pricing, yet many business owners are not aware of their eligibility or have concerns with the process of entering. Lighthouse, An Alera Group Company offers a team of experts to help business owners decide if a captive is the best alternative risk option and if so, ensures the transition causes little to no business disruption. To help explain the cost-saving complexities of captives, Lighthouse has put together a helpful guide:
What is a Captive and How Does it Work?
Captives are a risk funding mechanism that allow an organization the opportunity to establish their own insurance programs. By using a captive, a company can reduce the premiums being paid to insurance carriers and recapture part of these premiums as long-term equitable savings.
Property & Casualty:
There are two main captives available in the Property & Casualty space. The first, and most common, is a Group Captive solution. This allows an individual member to join the ranks of their high-performing peers in an already developed and operating captive. The idea of the group formation is to meet IRS guidelines for insurance company development and minimize taking on all of one’s individual risk in terms of a catastrophic claim. The benefit is one’s renewals are still exclusively rated on their individual performance – not that of the group. The ideal member typically is paying anywhere between $100,000 and $1M in annual premium for their casualty lines and have very low loss experience. The alternative to a Group Captive, and for a much larger organization, would be to develop their own Single Parent Captive arrangement. The idea is very similar to the Group Captive, however, this member sits alone and does not have risk sharing with other organizations. They simply are large enough to absorb and minimize their own losses. These arrangements typically begin at the $1M mark in annual premium.
How a Property & Casualty Captive Works:
Employee Benefits:
On the employee benefits side, many groups eligible to enter a captive do so for their Medical Stop-Loss insurance on their self-funded plan. To consider entering a captive, an employer must have a minimum of 52 lives enrolled in their medical plan and have at least $5 million in assets. Lighthouse sponsored Employee Benefit Captives are unique in that they are employer owned and use strategic cost containment tools to reduce claims exposure and support their members. Some of these member-supporting concierge tools include onsite and near-site clinics, virtual primary care models, RX clinical management, and wellness programs.
While captive programs look different for commercial insurance and employee benefit plans, they both aim to achieve the same goals: improved cash flow, pricing stability, insulation from market volatility, greater control over your claims, and investment for insurance.
Is a Captive Right for You?
The team of experts at Lighthouse will help you answer this question. Because of the financial success of captive programs, they are particular about the qualifications to join. To learn more or to get started with the captive feasibility assessment process, contact:
Griff Gatewood
Vice President
Commercial Insurance
(616) 455-1652
Jason Nickel
Senior Vice President
Employee Benefits
(616) 745-3525
Lighthouse Captive Case Studies:
Property & Casualty Client:
Entered Group Captive in 2019
First year equity was 42% of potential 65% available
Second year equity was 58% of potential 65% available
Third year moved from Group to Single Parent to eliminate risk sharing and maximize performance, moving available equity from 65% to 70.02%
Employee Benefits Client:
Entered Group Captive in 2014
Average increase of 0.5% in total gross cost, with very little plan design changes and premium contributions.
Plans continue to benchmark well in terms of cost and value
The captive company (Pareto Health) offered a two-year guaranteed rate based upon the group’s willingness to address additional cost containment measures such as placing a cancer management program to assist members with second opinion services.
