Many senior living operators and managers are seeking more insurance options beyond what their brokers typically offer, which often involves raising retention and lowering coverage while still paying high premiums. As a result, partial and self-insurance is becoming more appealing. These options are known as captives and are very beneficial for the right situation and buyer. Captive and self-insurance structures must be thoroughly evaluated by both the buyer and the insurance broker who possess a deep understanding of the industry. They also need to be keenly aware of the self-insurance structure and how by acting as the insurance company will not have an ability to transfer the risk to any other insurers. In the senior housing industry captives are becoming more prevalent. Increasing premiums and lack of additional capacity has garnered the need to explore these alternative risk options.
Understanding captive insurance: single parent and group captives
A single parent captive is an insurance company created and owned by a single organization to insure its own risks, allowing businesses greater control over their insurance costs and coverage. In contrast, a group captive is formed by multiple organizations that collaborate to share risks and insurance costs, which can be particularly beneficial for businesses in similar industries.
Cost control and risk management
Captives help manage and contain costs, enhance control through additional reinsurance options (especially in claims management), and improve overall risk management. Due to the complex nature of this structure, most buyers should have a risk profile that warrants an investment of around $800,000 to $1 million or more, especially if they struggle to secure insurance in the traditional marketplace.
Types of domiciles: Domestic and offshore
Domestic domiciles
Domestic domiciles refer to jurisdictions within a country where captives can be formed and regulated. In the U.S., many states offer favorable regulatory environments for captive insurance, characterized by a supportive regulatory framework, accessibility, tax considerations, and established credibility.
Offshore domiciles
Offshore domiciles are jurisdictions outside a company’s home country that provide favorable conditions for establishing captives. Common locations include Bermuda, the Cayman Islands, and Guernsey, known for regulatory flexibility, tax benefits, asset protection, and global reach.
Key considerations
The formation of a captive begins with an actuarial analysis of the risk profile, including exposures, losses, and financials. Analyzing loss activity (typically over ten years, though five is acceptable) helps identify trends and develop a loss profile (standard loss frequency and dollar amount per year).
Key considerations include:
- Engaging a qualified captive manager to oversee the regulatory process based on the chosen domicile.
- Ensuring the captive is properly funded and passes regulatory approval to confirm its ability to pay claims and remain solvent.
- Providing additional collateral, usually aligned with the primary liability occurrence or aggregate layer, which may vary between single parent and group captives.
- Employing a Third-Party Administrator (TPA) to manage claims and ensure efficient and accurate claims processing.
While the initial motivation for forming a captive may stem from high insurance premiums or a lack of coverage, there are additional benefits to consider:
- Greater control over premium fluctuations and market disruptions.
- Freedom to choose vendors, service providers, and customizable reinsurance structures.
- Potential personal tax advantages in specific situations.
- The opportunity to create a new profit center instead of merely paying increasing reserves with limited control over claims settlements.
While a captive structure can be a valuable alternative for the right buyer, it is not without risks. To mitigate potential downsides, careful attention must be given to the formation and overall function of the captive to preserve its advantages.
In an ideal scenario where all mechanisms operate smoothly and claims projections based on historical losses are accurate, the captive model can enable operators or managers to succeed both now and, in the future, ultimately securing their long-term viability.
To learn if a captive is the right fit for your senior living organization, reach out directly to Chris.Zumhofe@MarshMMA.com.
