Captive Questions and Answers
Q – How large do I need to be to qualify for a Group Captive?
A – All Group Captives have a different appetite for the size of a new member, however, a standard rule of thumb is that you’ll want to have at least $250,000 in first-dollar (no deductible) premium in the following three lines of coverage, combined – Workers’ Compensation, General Liability and Automobile. A majority of Group Captive members tend to have captive premiums that range between $400,000 and $2,000,000.
Q – How much of my captive premium can I turn into a profit?
A – Most Group Captives operate with a fixed expense structure of about 32-35%. The remainder of your captive premium represents loss funding – for your expected claims. Therefore, if you experience very low claims in a given year, it’s very possible to get back more than 50% of your premium in the form of a captive distribution (i.e. profits).
Q – Will my premium in the captive be more or less than I’m paying today?
A – It depends. Most captive upfront premiums are fairly similar to what you’re paying today in the traditional market. So you might see a range of 10% less to 10% more. However, the real “savings” found by joining a captive will come via the captive distributions/profits that you realize in future years, if your loss experience is solid.
Q – Is it difficult to get into a captive?
A – It can be. All Group Captives are different.
– Many require a significant qualifying process to gain entry, including approval from the reinsurance carrier and all current members.
– Older, more established captives may decide to increase their minimum premium thresholds and require a new member to exhibit very low historical loss ratios.
– On the flip side, a newer/smaller captive might be more aggressive and willing to lower underwriting standards (slightly) in an effort to grow.
Q – I heard that in a Group Captive everyone shares risk and you end up paying for a lot of claims from the other members?
A – One of the elements contained in all group captives is that the members will share some risk with one another. In a well-run Group Captive, that number will end up representing about 2-5% of the total premium. Be sure to avoid captives where it exceeds 10% on a regular basis.
Q – Can you be assessed in a Group Captive?
A – Yes, there is the potential for assessments in any Group Captive. It’s a fundamental and necessary part of the captive structure. However, in a strong and healthy Group Captive, this does not happen very often. In a typical year, about 10-15% of the captive members in a given group will receive an assessment. It’s also important to note that a quality Group Captive will cap the maximum assessment for every member, and this number is known upfront.