While most companies that join a captive insurance program will tell you that control, superior claims and loss control services and stability within their insurance programs is the primary benefit of being in a captive, the financial rewards are certainly a close second. An employer’s primary reasoning for joining a captive should not be solely focused on the financial aspects, but as the number two (payroll being number one) budget item on a company’s financial statement, insurance cost is always of great focus to any employer. So just how do captives reduce costs to an employer?
Upfront reduction in premiums can be the most obvious place to see savings over
an employer’s traditional insurance program. Keep in mind, however, that a captive is not trying to be the low cost leader in the marketplace, but in fact adequately price risk to reflect how each of its members is performing within their operations from an insurance standpoint. Upfront premiums can be higher sometimes as well as is the case during an extremely soft insurance market cycle.
Lower Total Claims Settlement Costs
A well performing captive can point to its third party administration company (TPA) as a primary reason behind the lower overall costs. Unlike traditional insurance where the claims personnel are responsible to the insurance company and not the employer, in a captive arrangement the claims company and its personnel are accountable to the employers as members of the group captive. These TPAs can be fired by the captive members and administrator for poor performance and typically tout settling claims at about 15% less than in a traditional insurance carrier arrangement.
Dividends for Favorable Claims Experience
The real potential for savings come from the dollars that flow back to employers in group captives in the form of dividends after a policy year has been closed and all claims and expenses have been paid. While the return of premium in the form of dividends varies greatly depending on the performance of the employer and captive, it is not uncommon to see an employer receive a 20% – 30% (of the annual premium paid in) dividend or greater returned over time.
As the portion of an employer’s captive insurance premium sits in a “claims fund” waiting to pay for claims that may occur, those dollars earn interest income on the employer’s behalf. It’s important to note, however, that captives are more interested in protecting a member’s capital than playing the Wall Street game, so interest income tends to be conservative. Still, it inures to the employer’s benefit.
Cost Benefits of Being in a “Better than average” Group of Insureds
In addition to the potential direct financial cost benefits listed above, there are a number of more intangible cost benefits by being a member of a “better than average” insurance group. The underwriting entity for example can look at a group of well performing companies in a captive group and offer lower pricing than a traditional insurance company that is stuck with a lot of poorly run companies with poor historical claims performance. The benefits of leverage can be seen in a captive setting as well, where employers banning together can negotiate lower safety and loss control services, underwriting support services and excess insurance pricing.
To find out whether a Captive Insurance Program would be a good choice for your company, contact our specialists at Warren G. Bender Co.: 916-380-5300