Types of Captives
Types of Captives
There are several types and structures of captive insurance, from single parent to group captives. Each is built for a different size and kind of business.
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To see what a captive can do for you, it helps to know there are several types, each built to deliver specific benefits to specific kinds of businesses. There are two primary types: single parent captives and group captives.
Single parent (pure) captive
If you pay a large amount in premium, typically a million dollars or more in casualty premium, you may want your own captive so you are not sharing risk with unrelated companies. A single parent captive is a separate legal entity formed as a subsidiary of the parent organization. The parent controls it, and it insures the parent and its affiliates. It gives the parent direct access to the reinsurance market and the ability to customize its program, which lowers the cost of protecting the business and improves the program.
Group (association) captive
A group captive means joining other companies that also work hard at preventing and reducing claims. Casualty premium is the premium for your liability coverages, such as workers' compensation, general liability and auto. Entry points vary by program. Some group captives accept members at a fairly modest casualty premium, and others require $250,000 or more.
Because the entry point is lower than what self-insurance takes, you can reach a Total Cost of Risk close to self-insurance without the regulatory work that comes with being self-insured. A captive may also have tax advantages over self-insurance, depending on how it is set up, so talk with your tax advisor. These advantages are why group captives are the most widely used form of alternative risk financing.
Sometimes an association forms a group captive for its members. Those programs often include coverages the members need that are hard to find in the market, or that would otherwise take several separate policies.
Agency captive
An insurance agency or broker may form a captive to insure or reinsure a number of its business clients. The agency may believe those clients will produce an underwriting profit and want another source of revenue, or the captive may let it offer a more competitive program through specialty coverages or rates.
831(b) captive
The Tax Reform Act of 1986 created section 831(b) of the Internal Revenue Code, which made it practical for small and mid-market companies to own their own insurance company. 831(b) is a tax election. It lets a small captive, under an annual premium limit set in the tax code, pay tax only on its investment income and not on its underwriting profit. Depending on the captive's ownership and whether it meets the risk sharing and distribution requirements, premiums may be deductible and dividends may be taxed as capital gains instead of ordinary income. These are often called micro-captives. The rules are strict and the IRS watches them closely, so any 831(b) decision belongs with your tax advisor.
Captive structures
Along with the type of captive, there are several structures you could be part of.
Single cell captive
There is only one organization in the legally filed captive company. A single cell captive can be formed for one company (single parent) or for several (group, association or agency).
Multi-cell (rent-a-captive)
One large captive company lets multiple captives form and operate inside it. Think of a condo building. You have your own unit, but you are one of many units in the building. This lets businesses or groups get into a captive more economically, without all the cost of setting up their own.
Traditional multi-cell captive. Each cell insures the risks of its own captive, whether single parent, group, association or agency. But if one cell runs into serious financial trouble, the other cells can be hurt, much like a fire can damage the units around it.
Segregated (protected) cell captive. Also multiple captives inside a larger structure, but with a legal barrier between the cells that protects each one from the others. It is like a firewall between every condo unit. Damage stays inside the cell where it started, so another cell collapsing is not your risk. How strong that separation is depends on the domicile's law and the captive's documents.
Turning Premiums Into Profits
David Leng's book on captive insurance is written for business owners who are tired of the same insurance cycle every year. It explains how a business paying more than $100,000 a year in premium can take on some of its own risk in exchange for the potential rewards, and why captives have become the most widely used way to do that.
Where the Employer Success Program comes in
It starts with a Diagnostic and Plan. We read your loss runs, your mod worksheet and your key contracts, and we talk with the people who run the work. You get the pattern behind your claims and a short list of what's worth fixing first.
From there our claims, HR, safety and fleet people work alongside yours, and you get a Score Card at the start and every year after, measured against your own starting point.
Start with a conversation
Tell me what's going on. I read these myself and reply within two business days. If there's nothing worth fixing, I'll tell you that too.