Group Captives are a great strategy for the right type of contractor. However, they are not a one size fits all solution. Group Captives require time, money, and a long-term commitment to risk management.
Group captive formations have been on the rise in the last few years due to the hard insurance market. It’s easy to get caught up in the hype of stories about construction companies receiving million-dollar dividend checks after being in a captive for five years. Before you start daydreaming about the big dividend checks, here are five reasons you should not join a captive insurance company.
- You bid your insurance out every year to get the best “deal.”
- Why this would not work for the captive: Captive insurance is a long-term strategy that should be looked at as such. The longer you are in the captive program, the better results you will get. If you like to bid out your insurance every year, then a captive arrangement would not be for you.
- You pay less than $150,000 in premium for your general liability, workers’ compensation, and auto combined.
- Why this would not work for the captive: Within the captive insurance arena you are taking on more risk. We find that most construction firms that pay less than $150,000 in premium don’t have the internal resources necessary from a capital or safety standpoint. At that premium threshold, you are better served in a more traditional guaranteed cost program.
- Your Safety Program Needs Improvement.
- Why this would not work for the captive: Part of the captive underwriting process is to analyze the prospective contractor’s safety and loss control processes. It’s not enough to just have very few claims to gain access to the captive. They are looking for contractors who devote time and money to safety and loss control. A common theme amongst the best performing construction group captive programs is that safety and loss control is one of their top three KPIs.
- You have poor claims history over the past five years.
- Why this would not work for the captive: One of the main benefits of a captive is to return a portion of the unused premium back to the members because of favorable loss history. If your company has had consistent claims for the past five years that have amounted to more than 50% of your premium each year, then a captive would not be a fit.
- You don’t have the means to put up cash or a letter of credit.
- Why this would not work for the captive: Part of the process of joining a group captive is the initial investment that can be in the form of cash or a letter of credit. This is to protect the other members from credit risk of other members’ losses. If you do not have the capital or feel it would be better served in another investment, then a captive would not be an option for you.
There are still many benefits to traditional insurance despite the current buzz around captives. An MMA advisor can help find the best insurance option for your construction company based on your needs and goals.