Many myths exist about captive insurance – and most are simply inaccurate, unhelpful, and are holding far too many businesses back from achieving their best results.
Regardless of the many misconceptions, we’re here to share the truth about member-owned group captives and the advantages they provide to best-in-class companies.
Myth 1 – My Company’s Too Small for a Captive
One prevalent perception about captives is that they are reserved only for the largest companies. While it’s true that single-parent captives are generally formed by larger organizations, small to midsize companies can also enjoy the benefits of a captive by joining other like-minded companies in a member-owned group captive. Group captives specifically exist to bring together mid-sized businesses so they can gain the insurance negotiating power of their bigger competition.
Yes, certain types of companies are stronger candidates for group captive insurance than others– primarily well-performing businesses that actively invest in their safety programs. These best-in-class companies that remain in the standard market can actually end up limiting their growth in the long run by subjecting themselves to the same adverse market as other businesses that might not be of the same caliber.
Myth debunked: When it comes to who is best suited for a captive, it’s not only for the largest organizations. The truth is, only the most safety-conscious, financially strong, and best-performing companies are a good fit.
Myth 2 – One Catastrophic Loss Will Bankrupt the Captive
What happens if you have a million-dollar claim while in a captive? Despite common perception—the captive is not likely to face bankruptcy. Ultimately, this myth stems from a general misunderstanding of how captives truly work.
When people hear ‘self-insurance,’ they often assume that means they are on the hook for every potential claim and dollar spent. In reality, part of the members’ premiums are allocated to the group’s loss fund to pay for claims (up to a certain retention), and the remaining goes towards a re-insurance program that protects members from any larger losses.
Some companies may hesitate to take higher deductibles or retentions because of perceived uncertainty. However, this is exactly how insurance is designed to work and is most cost-effective when you retain and proactively manage as much risk as possible, and only use insurance for catastrophic losses.
Myth debunked: Catastrophic claims are often unpredictable and can happen to even the safest companies. In the captive, part of your investment is always in reinsurance to limit loss and protect members from larger-than-expected claims and any subsequent issues.
Myth 3 – I’ll Be Stuck Paying for Everyone Else’s Losses
In the traditional insurance market, it’s no secret you are sharing risk with the entire industry – both the good and the bad. Regardless of your loss history, rates are impacted by the collective insurance marketplace, not your individual experience – meaning the best-performing companies are paying for those with poor performance and more claims.
So, what’s different in the captive? The most crucial differentiator is that you know who your risk-sharing partners are. You choose them. Members are all similarly situated companies who share a commitment to safety and have common financial interests.
Yes– by pooling your exposure and risk of loss, you have accepted the possibility of paying for the other’s losses. However, the captive is strategically managed to predict and control losses and members only assume risk in the smaller, more predictable loss layer – the remaining is protected by reinsurance.
Myth debunked: In both the traditional market and in a group captive, there is risk-sharing. The difference is simply with whom. The captive is designed to group like-minded, safety-conscious companies that have a positive loss history and continue to manage risk and improve costs.
Myth 4 – Captives Are More Expensive
As covered earlier, in the traditional insurance market, companies transfer risk to a third-party insurer that collects a premium and requires a deductible – if you have a good loss history, the premium you pay subsidizes the other insureds whose losses are not as good. This option gives you little control and your good performance is to the benefit of the insurance carrier.
While the upside to the traditional market is simplicity and low start-up costs, the disadvantage is often exorbitant rate hikes, capacity issues, and claim disputes – all meaning more expensive premiums and sunk costs.
Captives have proven to be less costly and more efficient because the structure provides a premium rate that reflects the organization’s unique exposures, as opposed to market rates that reflect industry averages and typical exposures.
While it’s true that there are upfront costs in a captive, these initial costs should be viewed as an investment. Captive insurance is generally part of a company’s long-term strategy, where the investment into the strategy typically generates a return in the form of dividends.
Myth debunked: Captives are a true performance-based insurance solution. It’s an investment that generates an ROI, not an expense like a traditional insurance program. A well-run captive will reduce insurance costs, improve cash flow and members will share in the underwriting profits that typically would go back 100% to your insurance carrier.
Key Takeaways
There are plenty of myths that exist about captives, most of which are designed to make the programs seem scary and risky, but it’s important to remember:
You don’t need to be a mega-corporation to qualify for a group captive, but your company should be financially sound and maintain a favorable loss history.
Reinsurance is built into the captive to protect members from catastrophic claims events.
Captive members share risk with only the best like-minded, safety-conscious companies that have a favorable loss history and are committed to managing risk and improving costs.
A captive is a long-term investment that reduces insurance costs, improves cash flow, and rewards great performance by sharing in the underwriting profits.