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I would like to hear about any experiences, either positive or negative, that members have had with captive insurance companies (specifically regarding workers' compensation). We are a small manufacturing company and pay approximately $250,000 in workers' compensation premiums annually.
Scott McDowell (smcdowell@blairstripsteel.com )
Response:
A group captive is only one type of alternative risk-transfer mechanism that is useful for workers’ compensation.
Assuming your company has other self-insured risks (or wants to move part of a line of business in-house), it may be able to form its own domestic stand-alone “pure” captive insurance company. If annual premiums are less than $1.2 million per year, the captive may qualify under section 831(b) of the Code to have its premium income received tax-free, even though your company may deduct the premium in full. Although such a captive has to share risks with other captives in order to meet IRS standards, the economic risk of such an arrangement is often far less than that of a group captive.
Howard H. Potter (hpotter@intuitiveinsurance.net )
Response:
We are a California company that joined a heterogeneous workers’ compensation group captive a little over two years ago. We have saved a great deal of money by participating in this program. It is called Presidio and is advised by Captive Resources Inc. (CRI) out of Schaumburg, Illinois. CRI manages about 25 captives and has been in business since the 1970s. They have a very good track record, and some of their captives have grown to be among the largest group captives around.
The formula for calculating premiums is quite transparent, based on your previous five years of claims. There are two annual risk-management workshops, and every member is audited annually on their safety practices, which ensures that you are in with other good companies, and gives us members areas to focus on for improvement. Members failing specified criteria can be booted out. Finally, every aspect of the captive’s operation, including claims administration, is graded on customer satisfaction. I happen to be delighted with the claims administration we currently have.
Because premiums are based on a five-year rolling average, a company with an improving experience modifier will bank a good chunk of its premium as underwriting profit within this captive. The captive is domiciled in Grand Cayman, and so the money sits offshore, earning interest for three years, and then is returned – similar to the tax-deferral provisions of an IRA. The captive is audited by a Big Four accounting firm, and RBS Bank provides custodial services.
We are very pleased with being in a captive and are looking at moving other lines into the captive arrangement.
John Bailey (johnb@ramosoil.com )
Response:
We have a setup with PMA, our insurer, which just about all insurers offer. It allows you to pay actual claims with stop-loss coverage over a set total amount of claims paid. The insurance company charges for the insurance at about 15 percent to 20 percent of the total estimated cost and/or payroll for the coverage. It also provides loss-control management help, legal services, and so on, to assist the small company in managing its costs.
Tony DiGirolamo (Tony@SWEETSTREET.com )
Response:
We’ve been a captive for five years now. We made the change due to the poor claims adjudication of the traditional workers’ compensation carriers, because it wasn't their money. Our premiums are very fair and have accumulated a significant surplus already. The other aspect we like is that the group is made up of a good cross section of industries and geography, which helps our risk exposure. Based on our experiences and the fact that we were recruited by another FEI member, we're very positive about this concept.
Fred G. Weaver (fweaver@sumner-group.com )
Response:
We have been a member of a group captive insurance program since 2002, for workers’ compensation, auto, and commercial general liability coverage. Here are some things to consider:
1. The real economic effect is very similar to a high-deductible or retro plan, in that you (the insured) will effectively pay for most of your losses, and will reap the rewards if you don't have losses. A strong safety culture is essential for success. Make sure the other members of your captive group are equally dedicated to controlling losses. If you have a good workers’ compensation modifier (less than .90), chances are you will save money in a captive.
2. Someone in your organization will learn more about how insurance companies work than you ever imagined. When you belong to a captive, all the inner workings are exposed. But along with that, you will spend much more time than you do in the traditional insurance marketplace. If you don't want to make that kind of commitment, a captive program is not for you.
3. Make sure that whoever advises and manages your captive on a day-to-day basis is experienced and qualified. Our captive advisor is a company called Innovative Captive Strategies, based in Des Moines, Iowa. ICS runs a number of captive groups, both heterogeneous and industry-specific, and we think they do an excellent job.
4. In our experience, some of the biggest benefits from captive membership are the risk control workshops our group sponsors twice a year. We get updates on best practices and share ideas on ways to improve performance and cut losses. Another great advantage is in the claim adjusting process. The adjusters are keenly aware whose money is at stake and are very responsive to our concerns.
5. Check with your insurance broker to see what impact (if any) insuring through a captive will have on other lines. In our case, because we're in a captive, our umbrella rate is higher, but our property rate is lower. Go figure.
6. The decision to join a captive insurance program is long-term. It's not profitable to jump back and forth between a captive and the standard insurance marketplace. Captive programs are not the right choice for every company. Take time to fully understand and be comfortable with the program and the group you are joining. Don't rush into it.
Hope this helps.
Tim Blount (tblount@wheeler-con.com )
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