IMPACTING LIVES, PRODUCTIVITY, AND PROFITABILITY WHILE
TAKING THE FRUSTRATION OUT OF WORKERS' COMPENSATION!
Understanding Captive Insurance
Each section explores captives, starting with the basics through successful implementation
When you continually pay more premiums to insurance companies than they pay out on your behalf, where does your excess money go?
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Your efforts and focus on safety, the very attributes that have made you attractive to insurance companies, are allowing those same insurance companies to make an underwriting profit off your business. In essence, that underwriting profit is excess premiums, and it allows the insurance company to take on the risks and pay the claims of businesses that are not as focused as you are. Plus, your excess premiums go to benefit their shareholders in the form of insurance company profits.
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Then you realize your situation has gotten worse when the insurance industry experiences a "hard market," a time period when the insurance industry seeks to increase overall rates due to inadequately charging companies with poor claims experience enough premium. When better performing companies like yours cannot offset the losses of poorer performing businesses, the insurance companies still need to be profitable for their shareholders, so they must increase everyone's rates - including yours!
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In an effort to reduce their Total Cost of Risk, and gain more control over their own situation, you can see why businesses continue to turn to alternative risk financing market, particularly captives. Participating in a captive gives you opportunity to be rewarded by receiving the underwriting profit of your efforts, as well as any potential investment income. Rather than an insurance company and its shareholders receiving the benefits of your better results, you do!
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Captives are not a new concept; they have been around for over 100 years. A captive insurance company is a separate entity formed specifically to manage the risks of its parent company. Single Parent Captives, where a captive is formed to protect its owner/parent company, have long been used by Fortune 500 companies to manage their diverse risk portfolios; but the use of captives did not stop there. Liked minded business owners grouped together to form their own group captives so that they too could benefit from the same beneficial advantages of a captive insurance program.
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From around 1,000 captives in 1980, there are now over 7,000, according to a September 2014 report by Conning Research & Consulting. In fact, there has been more than a 35% increase in captives in the past 10 years as business owners become more sophisticated and demand better use of their capital. As a result, more and more businesses have turned to captives. And with that growth, the availability of middle market companies to access such programs has grown immensely.
Is it time for you to break that costly cycle?
If you are paying over $100,000 annually in workers’ compensation, general liability, and auto insurance premiums combined, you can break this costly cycle and gain more control over your insurance costs.
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Alternative risk financing is when a business does not purchase traditional guaranteed cost insurance policies, but instead purchases insurance where they take on some risk to get potential rewards. For clarification, there is more insurance premiums invested by businesses in the alternative risk financing market than you realize, with the use of Group Captives being the most popular of the alternative risk financing programs being used.
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“Over 90 percent of Fortune 1000 companies and many successful mid-market companies have captives,” stated Lance McNeel, Capstone’s Director of Insurance. “An estimated 50 percent of all property and casualty premiums are written through captives.” If you remain in the traditional insurance world, you will shortly be in the minority, and be at a competitive disadvantage as compared to those that are insured in the captive world.
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From this website, you will learn more about captives and the benefits of them. Just one of many benefits you learn about is how captives will provide you with the ability to have your premiums determined by the quality and results of your operations versus the overall average rates used in the insurance industry uses. At this point, you might already be asking yourself, is a captive right for me?
Captive
Basics
The key concept behind captive insurance is, in essence, self-insuring your risks. You might think that self-insurance is too much for you. But every business is basically self-insuring; it is just a matter of to what degree. Every business that buys an insurance policy has a retention that they are self-insuring, also known as a deductible.
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Most businesses do not want to pay a large, unpredictable $1,000,000 claim out of their own pocket, so they purchase an insurance policy from an insurance company. Typically they would buy a Guaranteed Cost insurance policy meaning that, other than the deductible(s), they will pay no more than the premium for their insurance protection.
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Many businesses that focus on reducing the likelihood of having a claim through safety and their business culture take on some risk to reduce their premiums. They may choose to keep the first $1,000, $10,000, $25,000, $50,000 or more of any claim (a deductible) and let the insurance company take on the rest. They know that the bigger amount they take on, the lower their premiums will be as most likely anything that may happen will likely be small versus catastrophic.
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The concept of using a captive is like taking advantage of using larger deductibles, and captives allow you to control what you will have to ultimately pay for your insurance protection, all while reaping the benefits when you perform better than the worst-case scenario.
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Just so you know the same concern over paying out huge claims applies to insurance companies as well. They do not want to take on millions of dollars in claims by themselves, so they go out and buy insurance themselves, which is called reinsurance. They keep only a portion of the potential claims, say the first $250,000 or $500,000 of a claim, and then let the reinsurance take care of the big claims. As the chance of something occurring that will bring about a claim of over $250,000 is very small, the cost of reinsurance is significantly lower as compared to the cost of insurance for the first $250,000.
The insurance companies can charge the largest amount of their premiums, and make most of their profits, from insuring these small, predictable claims and letting others (reinsurance companies) take on the large, unpredictable million dollar claims.
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From the “insurance side,” a captive insurance program looks, acts and feels like a typical guaranteed cost insurance program. You purchase a standard, guaranteed cost insurance policy from and pay premiums to a regulated insurance company. The insurance company, or an approved Third Party Administrator, will pay your claims. You will be able to deduct your premium when it comes to taxes, and you will even have a year-end premium audit. No one outside of your company will know that you are an owner of a captive or that your policies are reinsured by your captive.
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On the “captive side” is where things change.
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Your captive enables you, individually or as part of a group, to fund and pay for those smaller, predictable claims. Therefore, the potential underwriting and investment income profits, which normally would go to the insurance company to insure poorer quality businesses and benefit their shareholders, would go to you or the group. In essence, you are able to bypass the insurance company in the traditional insurance model and access the reinsurance marketplace directly to take care of those large, unpredictable claims, thereby dramatically reducing your insurance costs.
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Instead of any insurance company issuing you an insurance policy, a captive uses a “fronting” insurance company to issue the policy. The fronting company keeps a small percentage fee for the issuance of your insurance policies and dealing with any necessary regulations, state or federal filings, etc. The fronting company will then “buy” reinsurance from your captive and send it the net remaining premium. The fronting company is just what its name implies; it is the front or outward face of your insurance program.
As you can now see, your captive insurance company will really be a reinsurance company for your policies. Instead of insuring the large, unpredictable claims, you or your group insure the smaller, predictable ones and then buy your own reinsurance for the large, unpredictable claims.
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Your captive insurance company will manage and pay all of the claims for you or your group. After all expenses and amounts are paid out for claims, and if your captive takes in more money than it spends, it generates an underwriting profit that may be returned to you as the owner(s) of the captive.
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However, much like a regular insurance company, you do not want to have your captive pay for all of your potential claims by itself. Therefore, you must purchase reinsurance for the captive in order to limit what you may have to potentially pay out. Through the re-insurance your captive purchases, your captive insurance company will function much like high-deductible program where the captive pays for all claims up to a fixed point, such as $250,000 or $300,000. The captive will pay for claims up to that per claim amount for any single claim, and will pay for all claims to a point where the captive's aggregate deductible threshold is crosses and your reinsurance (your captive purchases from another insurance company) starts to provide excess coverage.
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After one or both of these deductibles have been exceeded, the excess reinsurance that the captive purchased will pay any additional claim amounts. The excess re-insurance thereby limits how much you may have to pay out for claims in a particular year.
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As the captive is an insurance company that has to pay the operating expenses, in addition to paying a premium to fund your claims, you will need to pay fees for the fronting insurance company, the captive's reinsurance company, the third-party claims administrator, and other normal operating costs of an insurance company.
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Just as with traditional insurance companies, the premiums that are received by your captive are not spent right away. They need to be set aside as reserves to pay claims. While the monies are held by the captive, the funds can be invested and any proceeds are available to pay claims or be returned as profits to the captive owners. Therefore, you may receive investment income to help pay for your claims and/or be returned to you as part of the captive’s profits.
In simple terms, a group captive is an insurance company created and wholly owned by multiple businesses to insure the risks of its member businesses. This beneficial structure is established to meet the risk-management needs of the owners or members.
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The standard insurance market is based on the law of large numbers. Better run businesses with fewer claims subsidize those with more claims. Those “better” businesses, that are well-run and safety-focused, can qualify to come out of the standard market and insure themselves in a captive program where the collective risk is significantly lower than in the general insurance pool. Since these businesses will have fewer claims, they will earn lower premiums than they would in the traditional market. Over time, most members earn very significant premium reductions.
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Your premiums are determined by actuaries based solely on your individual claims history, not by general industry averages or insurance companies. Remember, captive members typically have better claims histories than the industry average and therefore having premiums based solely on their history will result in lower costs. Since members in a captive typically improve their claims performance year after year, this compounding of lower claims every year can produce rates for you that are dramatically lower than the industry average.
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Approximately 40% of your premiums will be used to cover the expenses of your captive program. This will include the fronting company fee, the reinsurance for your captive, the claims management costs, agent commission, as well as other captive operating costs.
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This lower cost structure of a captive allows approximately 60% of your premium to be seeded into your Initial Loss Fund (see B in Captive Program diagram below), as shown in the diagram above. If you do not completely use your Loss Fund, it will remain in your “account” for later distribution, potentially earning investment income. Also, since those claims that do occur are not paid immediately, the required claim reserves will also be set aside and invested with any investment proceeds also going to your account. As you can see, investment income is a significant way to help pay for potential claims as well as something to be returned to you later as a dividend.
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As you can see, the combination of shrinking premiums and the return of underwriting profits to you translate into an overall dramatically reduced cost to insure a business as compared to the traditional insurance marketplace.
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Still, businesses in a captive typically also receive the additional benefit from Greater Control over their Risk Management Program due to an excessive pricing, limited capacity, coverage that are unavailable in the "traditional" insurance market, and/or the desire for a more cost-efficient risk financing mechanism. They are able to achieve that control through improved cash-flow, transparency, the ability to customize coverage, improve claims handling and reporting, and stabilized budgets.
To learn more, please download a free copy of Turning Premium Into Profits.
Benefits of
group captives
types of
captives
To better grasp the benefits of captive insurance, it is important to understand that there are a variety of types of captives developed to deliver specific benefits to specific business types.
Types of Captives
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There are two primary types of captives: Single Parent and Group Captives.
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Single Parent (Pure) Captive. If you are paying a significant amount in premium, typically a million dollars or more in casualty premiums, you may want to form your own captive so you are not sharing risks with other companies not related to you. The single parent captive is a legal entity formed separately as a subsidiary to a parent organization. The parent controls the captive to insure the parent company and its affiliates. It gives the parent company the ability to directly access the reinsurance market, as well as customize your insurance program as well, thereby reducing your costs of protecting your business while improving your insurance program.
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Group (Association) Captive. A Group Captive entails joining in with a group of other companies that also have a significant focus on preventing and mitigating claims. In a group captive, you may be able to enter the captive for as little as $75,000 of casualty premiums. Casualty premiums are premiums for your “liability” coverages, such as workers’ compensation, general liability, and auto coverage. However, some group captives require $250,000 or more for casualty lines premium. Due to the lower premium requirement as an entry point as compared to self-insurance, you can receive a significantly lower Total Cost of Risk that is similar to that of self-insurance, plus you do not have to deal with all the regulatory headaches associated with being self-insured. Plus, participating in a captive can have tax advantages over self-insurance as well. Because of these advantages, you can see why Group Captives are the most popular form of alternative risk financing.
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In some situation, an association may form a group captive to benefit the members of the association. In those circumstances, it is not uncommon for the association program to include coverages needed by the members that may not be available in the marketplace, or would require them to purchase multiple separate policies to obtain.
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Agency Captive. Sometimes, an insurance agency or broker may form a captive insurance company to underwrite and insure (or reinsure) a number of their business clients. The agent may do that as they believe their clients' policies will produce an underwriting profit and the agency is looking to expand its sources of revenue, or it will allow them to be able to offer a more competitive program either via specialty coverages or rates.
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831(b) Captive. The Tax Reform Act of 1986 created the 831(b) section of the Internal Revenue Code, making it advantageous for small-and mid-market companies to own their own insurance company. Therefore, 831(b) is really a tax election that allows small captives with gross premium income of less than $2.2 million annually to pay taxes solely on investment income and not on any underwriting profit. It may also allow for the tax deductibility of premiums, as well as the proceeds/dividends of captive may be taxed as a capital gain in lieu of ordinary income depending upon the captives ownership and should the captive meet the risk sharing and distribution requires laid out in the IRS code. These are often called "micro-captives. Learn more about 831(b) Captives.
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Structures of Captives
In addition to the types of captives, there are several structures you could be involved in:
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Single Cell Captive. There is only one organization in the legally filed captive company. A single cell captive can be formed to benefit a single company (Single Parent) or multiple companies (Group, Association, or Agency).
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Multi-Cell (Rent-A-Captive). These are captives structured so there is a large, single captive company that allows multiple captives to be formed and operate inside of it. Think of these captives as being similar to a condo building. You have your own unit, but you are one of many units in the condo building. This allows businesses or groups to enter into a captive program more economically as they will not have all the frictional costs of setting up their own captive.
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Traditional Multi-Cell Captive. Each of the captives in the large captive insures the risks of those separate captives whether they are a single parent, group, association, agency, etc. However, if one of the captive cells undergoes significant financial problems there may be collateral damage to the other cells in the captive, much like a fire may cause collateral damage to surrounding units.
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Segregated (Protected) Cell Multi-Cell Captive. Similar to that of a Multi-Cell or Rent-A -Captive in that there are multiple captives formed within the larger captive structure, However, there is a regulatory barrier between cells that protects each cell from each other. It is like having a super-firewall existing between each condo unit. No damage is going to occur outside that segregated cell. Therefore, you do not need to worry about the risk resulting from another captive cell collapsing.
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Is a Group Captive Right for Me?
Generally speaking, it is easy to determine if you might be a good fit for a captive. You just ask yourself the following questions:
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Do I have a strong focus on employee safety and a great corporate culture?
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Am I a privately-held mid-market company with predictable risks?
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Do I pay over a $100,000 annually in workers’ compensation, general liability and auto insurance combined premiums, or insure over 20 employees on my health insurance program?
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If I review my last five to 10 years of claims history, on average, are my total claims paid out less than 40% of the total premium paid to insurance companies over a period of several years? (For this calculation, cap any claim over $100,000 at $100,000 when you calculate your claims to premiums ratio.)
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Is my business financially strong with a positive cash flow?
If you can answer YES to these questions, a group captive may make financial sense. It is important to know that every captive member will need to be able to meet their claims obligations, and therefore they are financially reviewed by the captive manager. Because of this, each member business puts up collateral (or posts a letter of credit) in the first few years until their asset account has accumulated to a sufficient level.
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There are additional nuances that help determine how much a business will benefit from joining a group captive. A broker with experience in group captive insurance programs will do a more complete evaluation once a business is identified as a likely candidate.
Is a Group Captive
Right for me?
how to join a
group captive
How do Join a Group Captive?
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When considering making a move to a group captive insurance program, the decision-making process is different than renewing your business insurance in the traditional market, where price and service level are generally the driving factors. This is because a group captive program is a different method of purchasing insurance as it also establishes a separate mechanism for growing and preserving financial assets outside of your existing business.
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In addition to looking at the premium and claims payment history of a business, the captive manager will look at a number of other operational factors, including:
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Length of ownership
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Financial strength
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North American Industry Classification System (NAICS) Code
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The full analysis and qualification process can take two to six months. For this reason, it is not recommended that the evaluation of a group captive program be conducted in conjunction with a business’ regular annual insurance renewal.
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When determining the value and projected annual premium with a group captive program, it is important to understand that conventional bidding and negotiation of rates is not part of the process. Captives do not use the rates filed with regulatory agencies, but rather establish premiums, that are developed by an actuary using various calculation methods in determining your loss fund, sometimes referred to as a “loss pick”. These determinations use five years of claims and premium data to determine the premium amount and claims fund deposit needed to protect the other members of the captive.
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These actuarial forecasts tend to be conservative (more expensive) in the early years of captive membership because, as most business owners are aware, captives have differing claims reserves and payment practices. As a business ages in a captive program, the claims experience becomes more predictable because the claims reserving and payment strategy is set by the captive owners. This results in more significant cost savings and asset growth over time. (We will be going more in-depth into the actuarial review in the next chapter.)
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The process of joining a captive will take between three weeks to three months depending on the complexity of the business considering the option and the workload of the captive management company.
How does your business face your "uninsurable" risks? Do you even know what they are?
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Over 90 percent of Fortune 1000 companies and many successful middle market businesses have 831(b) Enterprise Risk Captives. The name 831(b) Captive comes from the actual US tax code provision that was enacted as part of the 1986 Tax Reform Act enacted by Congress and signed by President Ronald Reagan into law during his 2nd term – U.S. Code, Title 26, Subtitle A, Chapter 1, Subchapter L, Part II, section 831, subsection (b), of the United States Internal Revenue Code, titled “Alternative tax for certain small companies.”
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Theses 831(b) Captives, are also referred to as "Micro-Captives", “Mini-Captives” or “Enterprise Risk Captives”, and are used by profitable, cash flow positive mid-size companies looking for cost-effective ways to finance and transfer risk that the traditional insurance marketplace cannot "insure". When properly structured, there are numerous benefits of owning an 831(b) Captive including possible financial, estate and tax advantages, such as:
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it provides a business the means to accumulate a loss fund, in a tax favorable way, to provide the liquidity to pay for a loss that may not normally be insurable in the traditional insurance marketplace,
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premiums paid by the business to the captive would be a legitimate, tax deductible expense,
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the 831(b) Captive pays no Federal income tax on the premium collected but the captive company makes an election at its inception to pay tax only on its investment income,
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the underwriting profits of the captive may be returned to the captive owner(s) as a capital gain instead of ordinary income, and
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the captive may be owned by the individual owner(s) of a business, or by others not related to the business including family members.
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From the benefits above, you can see why the use of an 831(b) Captive is one of the most popular choices for middle market companies to help manage their risks. However, there are limitations to the captive: the captive will have maximum annual premium limitation of $2,200,000; and the captive cannot directly pay a third party, it can only reimburse the insured business for covered losses that occur. Because of these limitations, it is predominantly used to insure risks that no traditional insurance company will cover, or to fill holes in an existing traditional insurance program.
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There are innumerable other kinds of exposure and risks that your business faces in your daily work activity that you may, or may not, recognize as being a threat to your success and perhaps your future existence. Various other types of risks include, but are certainly not limited to the following:
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Political risks — civil unrest, terrorism, war or intentional violent acts
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Regulatory — unintentional loss of personal or business licenses, statute changes
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Contingent Liabilities — weather, lack of materials or manpower
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Trade Credit — diminution of values, accounts receivable
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Business — loss of a key client, franchise or supplier relationship; loss of Bonding Capacity; material price fluctuations
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Financial Risk — interest rate fluctuations, foreign exchange rate fluctuations
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Reputation — brand value, key person and/or corporate image
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Competition — price wars
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Service Contracts — furniture, appliances, autos, equipment, homes
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Non-ERISA Medical Plan losses — HRA’s
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Large Deductible Losses — workers comp, medical plan, liability
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The types of exposure noted above truly only “scratch the surface” of what a business may protect from loss through the use of an 831(b) Captive. You may also think of numerous other risks that are not typically insurable, or perhaps not affordable, through the commercial markets. One way to identify risks that are not being traditionally insured by you is to open your liability and property insurance policies and read what is describe as not being covered (such as paved surfaces, bridges, or underground property) or specifically excluded (such as your product, your work, or intentional acts of an employee). Most of those exposures may be insured non-traditionally with an alternative market approach such as an 831(b) captive.
Important Note
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There have been IRS and court challenges to the 831(b) captive product, but if the rules and regulations are followed, the captives have prevailed in most cases. The two most critical issues that an 831(b) Captive insurance programs will face scrutiny of are Risk Transfer and Risk Distribution.
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Risk Transfer
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There must be clear, documented transfer of the risk from the operating company to the insurance company.
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The risk transfer is accomplished via the issuance of an insurance policy, with actuarially determined premiums and a clear set of insuring conditions and policy terms.
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Risk Distribution
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The insurance company needs to have third party business (unaffiliated to the single operating company) within the insurance company’s written premium.
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There is no current regulation that determines the required level of third party business, though most insurance professionals focus on levels ranging between 30% to 50% of the total written premium of the company.
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Third party business may be acquired in a number of ways, including the pooling of various exposures with other captives, simply purchasing unrelated insurance business from other carriers and even some insurance policies that the captive may issue might qualify as unrelated business.
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Now, after reading all of this, you might be thinking that the federal government does not like 831(b) captives, that is not the case. In fact, congress passed the 2015 Appropriations Bill under the Obama Administration that actually increase the maximum allowable premium for an 831(b) Captive from $1,200,000 to $2,200,000. The Federal Government clearly understands the need for and benefits of a properly structure 831(b) Captive, they are simply trying to keep the use of these from being abused.
Employee
health insurance
Captives
A practice that has existed for decades, the use of a captive for employee health insurance coverages, has exploded in recent years as employers seek to overcome the affects that rising health insurance premiums have had on their bottom lines. Employers have been moving to captives, particularly group captives, for a multitude of reasons, think of the Five C’s: Control, Claims, Coverage, Compliance, and Cost.
Control
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Employers have the feeling that they have no control over their health insurance program, how their employees use the health insurance, and how claim costs are contained. The use of a captive for employee health insurance gives an employer the ability to take back control as you will discover as we explore the rest of the C’s.
Claims
Unlike when you are fully insured, you will have easy access to your claims data. You may be able to receive some data from your traditional insurance company if you are large enough of a client that they are willing to provided it, however they usually do so reluctantly and with delays. In a captive, you will readily receive your claim information. It will not be employee specific, but you will be able to see what employees are being treated for, or diagnosed with, in general. That way, you can establish wellness programs to try and combat areas that may raise your healthcare utilization and therefore your premiums. It is simple risk management; if you see issues that are causing claims, you put programs in place to mitigate the impact of those issues, or better yet, put programs in place to prevent things from occurring, or at least occur less frequently and with less severity. This is where Employee Wellness programs can have an impact.
Coverage
Being part of a captive, you are able to customize your insurance coverage program. You will not be restricted to one specific insurance company’s network, you will able to choose a network, or networks, you want from a multitude of options. This will allow you to choose based on locations, medical providers, or discounts available within a network.
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You can also customize the coverage to control costs. If you see too many people using emergency room services, which are far more expensive, you can change your employee co-pay in the middle of the program year to a higher co-pay to dissuade them from doing so. If you see too many chiropractic visits, you can set limitations. The ability to restrict coverage to control costs, so long as you are still compliant with regulations, you will be able to do so. You can make these mid-program year changes by simply giving your employees written notice of the change.
Compliance
Your captive manager, or broker, will make sure you are compliant with current regulations so you do not need worry about this. If you are self-insured, you must undergo Department of Labor exemptions for the ERISA benefits, the same would apply to the use of a single-parent captive. The Department of Labor still views a single-parent captive as being self-insured with regards to ERISA compliance. In both cases, your captive manager or broker, will assist you with compliance. On the other hand, if you are participating with a group health insurance captive, you do not need to file for exemption to meet that ERISA requirements.
Cost
As you can see, a captive has all the advantages of self-insurance when it comes to cost control, and if you are in a group captive, you have less regulatory compliance to worry about. However, there are additional benefits with a captive.
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Right out of the gate, a health insurance captive has the benefit of being viewed as a self-insurance program, and therefore exempt from the Affordable Care Act (ACA) Insurer Premium Fee (Tax) assessed to all health insurance companies does not apply. What started out in 2014 as an $8,000,000,000 (yes, that is $8 Billion) ACA assessment fee to all health insurance companies, increases to $13.9 Billion in 2017, and will be indexed upwards from there. This ACA fee is applied to all health insurance companies based on a percentage of their premium written in the entire USA marketplace for traditional health insurance (not self-insured). As everyone knows, this fee is clearly being passed on to employers using their traditional insurance company programs.
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Second, cash flow is more predictable. In the self-insured world, you must pay your claims as incurred, so if a number of employees seek service in one month, or an employee has a significant healthcare event, you would have to pay for those service costs, up to your stop-loss points, at one time. Therefore, one month may be a small payment and another large. With a group captive, can pay in monthly as the group would most likely be able to spread the claims payments over more employers so all you may have is your normal monthly premium payments.
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Third, just as we discussed before, insurance companies make more profit from insuring the smaller, predictable and controllable claims than they do from covering the unexpected, catastrophic claims. Using captives, a single employer, or group of employers, can self-insure their smaller, more predictable claims and then utilize reinsurance, also known as Stop Loss Coverage in the health insurance world, to cover the unexpected, catastrophic claims. This allows the employer(s) to receive the potential underwriting and investment income back in the form of a dividend.
There two significant differences between health insurance captives and captives that provide general liability and workers’ compensation coverages: the claim runoff period and the funding for losses.
Claim Runoff Period
The claim runoff period used in healthcare captives is significantly different than those insuring liabilities. We discussed that in when you insure liability claims, that it may take years for them to be reported (remember IBNR) or settled. In the health insurance captive world, the captive is paying the claims as services are incurred, therefore there is no long period needed for claim reporting, development, settlement, or even IBNR.
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For example, if you see your doctor on December 28th of 2016, and the bill arrives on February 1st of 2017, the 2016 program year of the captive takes care of the bill. Your follow-up visit on January 2nd that you also received the bill for on February 1st would be paid in the 2017 program year. All treatments, physician visits, prescriptions filled that occurred during a captive program year are paid by that captive year.
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As you can quickly see, in health insurance, there is no long timeframe that you have to wait to see if or when a “claim” is made, or how long it will take to settle an issue in court. Therefore, there is no need for a five to seven-year captive program year closure timeframe. Healthcare captive programs typically have a three to six month claim run-off period where they do wait for the bill for services rendered during that program year. After that very short claim run-off period, a dividend will be declared.
Health Insurance Loss Fund
In a captive that insured things such as workers’ compensation and liability, it is common for the loss fund for a business be set at the predicted loss amount, as we discussed, the Initial Loss Fund. There In these captive, it is also common to have a stipulation that there be an amount that the business may also have to pay should the claims of the individual company exceed a certain amount, the Potential Loss Fund. These two combine to be the total maximum loss funding before the maximum aggregate retention point is reached and the excess reinsurance starts to pay for the claims. The funding for such a captive was outlined in Chapter 2-What is a Captive.
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In a Health Insurance Captive, it is common to fund to the maximum aggregate retention. Funding your loss fund in this matter provides two benefits: first, collateral requirements will be reduced as the captive should have enough funds to pay for a worst case scenario; and second, since the likelihood of the aggregate payments that the captive has to pay for its retained claims is very unlikely, this makes it common to have underwriting profit and therefore dividends are frequently paid.
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Based on everything outlined here, you can see why health insurance captives have become so popular. They typically are very competitive in terms of the premiums being paid upfront as compared to traditional health insurance, they can return underwriting profit dividends, and can provide the ability to control your plan more to your needs.
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An additional note: There is a perception that your HR department will have an increased burden of work (and anxiety) when it comes to administering a self-insured or captive program. In reality, with today’s technology, the integration between your network(s) and your third-party claims administrator will feel more like a traditional health insurance company than you realize. Plus, your captive manager or broker should be able to assist in the administration and changeover. However, just as with changing any healthcare insurance company, you will still need to go through the process initially of changing “insurance providers”.
Turning Premiums Into Profits
Hit #1 Best Seller on Amazon
in September 2017
As a business owner, or business leader, when you look at the amount of money you have just handed over to the insurance companies and received very little, or nothing in return, and the exhausting amount of time you have spent trying to obtain bids or quotes to reduce the cost of your insurance program, only to fall short of the real results you wanted to occur, how can you not feel frustrated… or like you are going insane? And why do they keep doing the same things year after year when it comes to your insurance programs? After all, isn’t that the very definition of insanity; doing the same thing over and over and expecting a different outcome?
But that high-priced insanity stops here.
In his latest book, David Leng shows you how to break this costly insurance cycle and gain more control over your insurance program while simultaneously building equity that will help you and your business, rather than it being pocketed by the insurance company and its shareholders. You will see how businesses that are paying over $100,000 annually in insurance premium can benefit from Alternative Risk Financing, where a business does not purchase traditional guaranteed cost insurance policies, but instead purchases insurance where they take on some risk to get potential rewards. With a 30-year track record in advising employers on how to save substantial money in their premiums, David spells out clearly and precisely why the use of Captives has become the most popular of the alternative risk financing programs being used today. And why it just might be the solution your company needs to increase both its profitability and its equity.
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Your Single Destination for Captive Solutions
“Selling” you on using insurance captives is not what we want to do, as captives are not for everyone. Only businesses that understand and can benefit from using insurance captives should pursue using captives to finance their risks. Providing the guidance, tools, support, resources and education needed to help achieve success is the focus of the Duncan Financial Group.
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In addition to guiding and supporting you through the entire captive process, Duncan provides initial and ongoing workshops and webinars on the types and structures of captive, how they work, how to gauge success, benchmarking results and key performance indicators, understanding captive financials, as well as keeping you abreast of current events that impact the captive insurance world. Having a deep understanding of the captive success factors and challenges you may face is key to improving your captive success.
Captive Discovery Services
Preliminary Feasibility Study
Although reducing insurance costs through the lower cost structures of captives is attractive to business owners, it is important for a business owner to know if a captive is the right option for them. We will perform an analysis of your safety and risk management
practices, as well as a claims analysis, to determine if the time is right for you to look at a captive. We can also determine if a group or association insurance captive, or your own single parent captive, makes the most financial sense for you to pursue.
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Preliminary Financial Analysis
Entering a captive can be financially advantageous, but there is an initial cost of starting your own captive, or entering a group captive. We will review those costs as well as assess the impact of the collateral requirements on your financial picture. This includes potential impacts on cash flow, loans, or lines of credits. Our accounting and CPA professionals can review your current financials, and financial situation, and help advise you in your decision, and even make recommendations to help structure your financials before submitting for captive review.
Preparation of Captive Submission
Qualifying for a captive and establishing your premiums and reinsurance costs requires a much more extensive compilation of data about your business, your operational and claims history, and financial picture. We will walk you through this process and help gather all of the required data; we will then compile it into formats that the captive managers will want so that they can analyze your submission to join their captive.
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Captive Manager/Program Selection
With over 7,000 captives, over 1,000 captive managers, and hundreds of group captives, finding or creating the right captive program and choosing the right captive manager is important for both the protection and financial success of your business and your captive. In addition to our own captive domiciled facility and captive manager, we have access to dozens of captive programs and managers that can best meet your needs.
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Consultation on Captive Ownership
Understanding who should own your captive can impact who has the financial responsibility and benefit of the captive, such as receiving dividends from the captive and their taxable impact. Understanding your goals, whether business, individual, or even your estate, will need to be considered when determining who should own your captive or captive shares. Our captive experts, and accounting and CPA professionals can advise you as you make this important decision.
Improving Captive Performance
Claims Advocacy
Ultimately, your claims will determine the success of your captive performance. Helping to minimize the cost of your claims will be crucial to reducing how much is paid out and increasing the profitability of your program. Our deep team of over a
dozen seasoned claims professionals will be your advocate and work to make sure any claim is managed, settled, or even denied, in your best interest.
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Safety & Risk Management
You already have a significant focus on safety and quality, otherwise you would probably not be interested in insurance captives. However, identifying risks in your business, and determining the best ways to reduce or eliminate those risks will help achieve greater captive success. Our team of over a dozen Certified Safety Professionals, Certified Risk Managers, and Certified WorkComp Advisors can help your team build and implement custom risk management programs to reduce your total cost of risk and improve your captive profitability.
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Human Resources
The success of any business starts with its employees. Hiring, managing, training, and retaining the best employees are obviously critical. Our deep team of human resource specialists, including a human resources attorney, is there to support your team so they have the right information, make the right decisions, and implement the best programs.
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Benchmarking Captive Performance
Just because you are in a captive, does not mean that you do not need to worry about how things are going, how things are performing. Assessing how well your captive is performing, especially in a group or association captive is critical. We will work with you to assess how well your captive cost structure is performing against the traditional marketplace, help you to understand and determine if there other members of your captive that are overly negatively affecting your results, and if the captive cost structure is appropriate.
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Benchmarking Your Business’ Performance
As the cost of your captive insurance program is directly affective by your claim costs, it is important to manage your captive, not by the end results (your claims) but by a complete matrix of criteria that are leading indicators of potential problems that could lead to claims. Criteria such as injury frequency, near misses, rejected product counts, turnover, peer observation reports, and out of service vehicles, are just a few of the leading indicators with point to potential larger issues. Our deep risk management and safety professionals will help you to build the matrix of criteria to benchmark yourself against, as well as structure the means to test and measure them.
Additional Captive Services
Insurance Program Design
Even with insurance captives, you buy insurance to pay your unexpected claims. Since it’s common for business owners to mix business assets, property, vehicles and investments with personal ones, oversights often occur under traditional insurance
arrangements. In addition to our Risk Assessment helping you to become a safer, more productive and profitable company, the assessment provides us with unique insight into your operations, and both your business and personal world. Through our Coverage Analysis, we will make sure that your business and personal insurance protection meets your needs.
Captive Audits
If you are already in a single parent captive, or group or association captive, we can perform a deep analysis of your captive and your overall safety performance. Using benchmarks, we can help you determine if the captive is actually benefiting you or not, and if there are other factors that need to be addressed to help you to improve your insurance captive performance