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:
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.
Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.