As you explore options for workers’ compensation insurance, you may encounter group captives. These arrangements can provide an effective means of pooling resources, sharing risks, and potentially reducing costs, particularly during challenging market conditions. However, before making a commitment, it is essential to consider several key factors.
There are many types of group captives. Captives are generally classified as either homogenous (open to only members of the same industry) or heterogeneous (open to members from a variety of industries). Generally, workers’ compensation is the dominant (and sometimes the only) line of coverage underwritten through the group captive scheme.
Five considerations of group captives
- Understanding risk sharing –The mechanics of risk sharing within a group captive is where each member shares a portion of the risk. Understanding both your individual risk exposure, the risk exposure of other members, and the collective risk retained by the group is vital. Membership in a group captive entails the possibility of assessments based on performance. It is imperative to clarify how these assessments function, including their timing and potential liabilities. Consideration must be given not only to your own loss experience but also to the adverse experiences of other members. It is important to ascertain these specific implications for your organization.
- Be aware of other member impact – It is essential to know the identities of other members and how their distinct operations may negatively affect the shared captive expenses among all members. This consideration is particularly relevant in heterogeneous group captives, where the administrative expenses of one or more members may be socialized among the other members
- Know the ultimate cost – Many cost components may be unbundled, and some may not be immediately apparent. Be sure to have a comprehensive understanding of all potential costs, including those related to older policy years and any assessments that may arise, including tail funds.
- Total security requirements – Members are typically required to post security at approximately 140% of estimated ultimate losses. This requirement exceeds that of traditional loss-sensitive programs, which generally necessitate security at around 100%. This elevated requirement may persist for 3-4 years, necessitating careful financial planning.
- Have a clear exit strategy – Exiting a group captive is more complex than changing commercial insurers. The exit process includes how your open claims and assessment will be managed. Ideally, a clear exit calculation should be provided to ensure that you are net left feeling constrained by your membership.
Joining a group captive represents a significant commitment. It is essential to thoroughly evaluate all associated factors and to understand the financial and operational implications, including the exit strategy. A well-informed decision will help ensure that you do not feel unduly restricted by your group captive arrangement.
If you have more questions about group captives, please contact your Marsh McLennan Agency advisor.
