CAPTIVE RESOURCES
“Mid-sized companies have joined member-owned group captives at an exceptionally rapid rate, and further dynamic growth is looming on the horizon.”
• Workers’ compensation, general liability, automobile
liability and physical damage, property and products liability are the most common coverages.
• Heterogeneous and homogeneous options are readily available. There are no major differences in the way these operate, but a prospective member may feel that a homogeneous captive with loss-prevention programmes tailored specifically to its industry will be more beneficial than, say, a heterogeneous captive offering a greater spread of risk across various industries.
• Successful group captives target best-in-class risks: companies that are among the best in their respective industries. Members are financially strong and stable, have management with a shared commitment to safety/loss prevention and proactive claims management, and an average, or better than average, loss history.
Catalysts of growth Today, mid-sized business owners are proactively choosing to be captive owners, versus being driven to explore a captive due to the exorbitant cost or lack of availability of coverage in the commercial market, as was often the case in the early 1980s. Joining a member-owned group captive should be largely a market neutral proposition, and this is increasingly the case, as significant growth has punctuated both hard and soft insurance cycles. Despite an extended soft market, during which commercial insurance rates have been—at times—extraordinarily low, mid-sized business owners’ interest in these captives has continued to grow. There are several reasons for the intense interest of recent years.
• Desire for control: The desire for greater control has led to a generally more vigilant and aggressive posture toward managing risk in the middle market. There is frustration with the traditional market pricing model and the cyclic nature of the industry, which exacerbates efforts to maintain predictability and control.
64 CICA | Forty years of captive leadership
Member-owned group captives appeal to mid-sized business owners seeking long-term control and cost stability.
• Economic conditions: A persistently difficult economy is motivating companies to squeeze every dollar of expense and to look continually for ways to control costs.
• Greater knowledge and acceptance: In recent years, awareness and the market presence of member-owned group captives has increased markedly in the middle-market sector. Mid- sized companies recognise that captives are no longer the sole purview of large corporations, and are more receptive to exploring the possibilities of captive ownership. Businesses now readily consider member-owned group captives as a viable and practical risk management solution.
• Improving availability of credit: Recently, an increased availability of letters of credit (LOCs) at improved prices has facilitated membership. LOCs remain the most widely accepted form of collateral for member-owned group captives, and following recent turmoil in the financial markets, restricted credit had been an impediment to captive membership for some companies. Respondents to CICA’s annual Fronting Survey in 2009 and 2010 indicated ‘collateral concerns’ as their biggest challenge to ownership (22 percent and 27 percent, respectively), but in 2011, this was not nearly as worrisome (12 percent).
Benefits of membership Certainly, as member-owned group captives have moved into the mainstream of the insurance and risk management arena and the benefits of membership have become more widely known, this has generated interest and contributed to growth. The major benefits of membership include:
• Control: Members are able to control their own insurance destiny by limiting the adverse effects of the cyclicality of the insurance industry on their businesses. They recognise that the captive provides long-term cost stability, their premium is derived from their own experience (and, as such, is within their influence and control), and that the captive’s operational costs will be lower than that of the traditional insurance market due to greater efficiencies gained through the unbundling of services and the buying power of the group.
• Dividends: Members’ unused loss funds (underwriting profit) and investment income is returned to them in the form of dividends.
• Premium deductibility: From a tax standpoint, if the group captive addresses insurance risk, incorporating sufficient risk shifting and risk distribution among the group’s numerous
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