Captives 101: The Basics

What Are Captives?

A captive is an alternative to traditional insurance placement for better-performing companies to manage risks, deal with insurance market cycles, provide financial incentives for loss control, offer creative insurance solutions and consolidate risk management. Instead of relying solely on traditional insurance providers, a company or group creates a captive insurance entity to assume the risks and provide insurance coverage to the parent company and potentially other affiliated entities.

Captives run like any other insurance company and are subject to state regulatory requirements, including reporting, capital and reserve requirements. They can be domiciled within the U.S. (an onshore captive) or outside the U.S. (an offshore captive). Today, there are more than 7,000 captives globally, according to the National Association of Insurance Commissioners (NAIC).*

Types of Captives

There are various types of captives, with Single-Parent and Group Captives being the most common. A Single-Parent Captive is owned by one company or organization, which is often referred to as the "parent company." The parent company controls the captive's operations, management and underwriting decisions.

A Group Captive is owned and controlled by its members to address the specific risk profile characteristics of its membership. Group Captives are the most familiar, with two types available. A homogeneous Group Captive is an entity owned by several like or similar type companies in the same industry or association, while a heterogeneous Group Captive is made up of unrelated companies representing different industries. Member count in a Group Captive typically ranges from 100 to 200.

Other types of captives include the following:

Rent-a-Captives, also known as Segregated Cell or Protected Cell Captives, offer smaller or mid-sized companies the opportunity to participate in a captive arrangement without establishing their own separate captive entity. Rent-a-Captives allow companies to rent or lease a "cell" within the captive structure.

Association Captives are formed by a group of companies within a particular industry or trade association. By joining forces, association members can access insurance coverage and risk management resources that may be otherwise challenging to obtain individually.

Risk Retention Groups (RRGs) are a type of captive specifically authorized under the federal Liability Risk Retention Act (LRRA). They're owned by their policyholders, who are typically members of the same industry or profession and band together to provide Liability insurance coverage for the group members.

Benefits of a Group Captive

Group Captives offer a ton of benefits. Here are the biggest, according to RPS Area Vice President and captive expert Riley Joyce.

Long-term Stability and Control

Companies gain greater control over their insurance coverage and pricing, which helps mitigate the impact of market fluctuations and provides stability in obtaining insurance.

"Over the past few years, the push behind group Captives in large part has been to help well-performing companies avoid heavy market swings characterized by significant rate changes," explains Joyce.

"With traditional insurance, all businesses are impacted by losses and underperforming accounts in a carrier's book of business. Carriers offset these losses by seeking rate adequacy across the board. However, an individual member is less likely to be impacted by another firm's losses with a Group Captive. In addition, while an increase in reinsurance costs affects both the traditional and captive market, the impact on insureds in the traditional market is much greater."

Customized Coverage and Risk Management

Group Captives offer flexibility in designing customized insurance policies and risk management strategies. "Members can collectively make decisions on coverage limits, policy terms and conditions that best suit their specific needs," says Joyce. This customization aligns insurance programs with the participating companies' risk profiles and risk appetite.

Risk Control and Loss Prevention

Group Captives encourage a proactive approach to risk control and loss prevention. Members can share best practices, implement robust risk management programs and learn from each other's experiences by working together.

"This collaborative environment fosters continuous improvement and enhances risk management capabilities," explains Joyce.

Increased Risk Capacity

Companies can access greater risk capacity than they would individually. By pooling their risks, companies can leverage the collective financial strength of the Group Captive to assume larger risks that might be difficult or expensive to insure through traditional markets.

Is a Group Captive Right for You?

Companies with the following attributes are good candidates for a Group Captive:

• Financial stability
• Better-than-average loss experience
• Strong safety program and a commitment to loss control

Individual or combined premiums (Workers' Compensation, General Liability, Commercial Auto) with a minimum premium of $250,000

Joining a captive involves consideration, including upfront costs, regulatory compliance and ongoing management. Businesses need to conduct a thorough analysis of their risk profile, consult with professionals experienced in captive insurance and assess whether it's a suitable alternative based on their specific circumstances and risk management goals.

"It's important for companies looking to join or form a Group Captive to be in it for the long term to gain the maximum benefits this alternative risk solution offers," emphasizes Joyce.

How RPS Works with Captives

At RPS, we provide Excess insurance over the primary policies (General Liability, Auto Liability and Employers Liability in Workers' Compensation) for individual members looking to boost their coverage.

"We can provide Excess Liability insurance over $100 million," says Joyce. "We generally work with Group Captives in construction, manufacturing, distribution, trucking, and oil and gas."