Groups are “Captive-ating” – 6 Reasons You Could Benefit from a Group Captive

“No man is an island,” said John Donne.  Humans are conditioned to gather together because togetherness feels good on all levels.  Even prehistoric people banded together for comfort, camaraderie and safety.  It was always a lot better to have a bunch of friends around when it came time to defend against a rival tribe or a rogue wildebeest.

Humans have not changed.  And because corporations comprise humans, they also have personalities and can experience benefits from getting together into groups too – especially when it comes to business insurance. 

Let’s talk about captive insurance benefits and in particular group captives.

A captive insurance company is essentially a way for a company to self-insure.  There may be several reasons for wanting to self-insure, such as when commercial insurance is too expensive or unavailable, or when the company has an excellent loss history and can benefit from lower premiums.  However, they typically require a company of significant size to make these benefits a payoff.

But, if you are an SME, you don’t need to be an outsider.  A group captive might be just the answer you have been looking for.

Here are six really good reasons why you might need a group captive.  Do any of these situations ring true for you?

1. You pay upwards of $150,000 annually for insurance

If your company is paying this amount annually for insurance such as workers’ compensation, auto insurance, general liability, property insurance and/or product liability; or has specific requirements for safety and loss control; or has other programmes with premium thresholds, then a group captive structure might be your answer for lower premiums. 

Single parent captives normally require around $5 million in annual premiums before the cost-benefit analysis starts to tip the scales in favour of a captive, but this initial amount can be reduced by pooling together with other like-minded companies in a group.

You can take advantage of the economies of scale and group discounts readily available from a group instead of being a small fish in a big pond.  Being part of a group captive gives you buying power – think $10 million or even $150 million in annualised premiums.  And there are often ‘group’ discounts available from other suppliers as well, such as safety equipment, specialist training and the like

2. You want to control your own insurance destiny

This is a big advantage for middle-market companies who would otherwise not qualify for a captive on their own, or where it would not make sense for them to establish one, but who still want to be able to have some control in how their organisations’ are insured and retain some of the cash flow from investment income dividends.

3. Your company has a strong safety culture

All successful captive programmes place great emphasis on loss control and risk prevention.  This is what they are designed to do.  To do this effectively means extensive senior management involvement to ensure that safety is a key part of the corporate culture.   Does your oganisation sponsor seminars conducted by safety experts for employees? Does it incorporate best practices and success stories from other organisations?  Would there be a willingness to share this information with other members of the group captive?

4. You like the idea of saving money

In addition to some of the discounts mentioned earlier, there are often savings to be had.  Direct expenses will be relative to the premium of each participant in a group, but other fixed costs such as license fees, audit fees, actuarial fees, bank charges and meeting expenses are shared amongst the group, soon making them relatively immaterial.   Also, if the group programme is correctly structured, and incorporates an appropriate level of risk sharing (amongst other things), then it should qualify as true insurance, enabling participants to take full deductions for their gross premiums.  Obviously, different structures and individual circumstances can impact this ability, so you will need to get proper tax advice.

5. You like the idea of making money

You don’t make any money when you buy your insurance in the commercial market.  The insurer offers you a package, you pay the premiums and then go to them for payouts if something should go horribly wrong.    However, you get to financially benefit from surpluses earned when a captive is well-run, prudent and conservative in its investment management decisions and policies.  Over time, this surplus should contribute significant sums to the bottom line of the captive.  Such sums accruing in a low tax environment will maximise post-tax returns, which is also a good thing.

6. You like groups!

There are plenty of benefits to being part of a captive programme listed above, but there are also more primal responses to being part of a group, such as the long term partnerships that come from true networking and sharing of business ideas with likeminded individuals.  Many times, relationships and business collaborations form outside of the captive – friendships are formed from the entrepreneurial spirit shared amongst the group. 

As you can see, the benefits of joining a group are plenty.  To find out more, reach out to your broker and tell them you want to speak to a captive insurance manager in the Cayman Islands to help you with a feasibility study to see if a group captive might be the right answer for your organisation.