When it comes to managing risks, businesses often purchase insurance from commercial insurance companies. However, an alternative to traditional insurance is the use of a group captive. A group captive is a type of self-insurance in which a group of companies pool their resources to insure the risks of their respective businesses.
By sharing the risk, group captives can offer members more control over their insurance coverage, potentially lower costs, and an opportunity to generate underwriting profits. Captive insurance companies can insure a wide variety of risks, including property, liability, and workers’ compensation.
In this blog post, we will explore the differences between renting and buying insurance with group captives, and the benefits and drawbacks of each option.
One of the primary advantages of a group captive is risk distribution.
By pooling resources, companies can spread the risk of loss across a larger group. This can result in a more stable and predictable loss experience, which can lead to lower insurance costs.
In addition, group captives provide members with more control over their insurance coverage. Members can tailor their coverage to meet their specific needs, rather than relying on a commercial insurance company’s pre-packaged policies.
Furthermore, group captives can generate underwriting profits. If the group captive’s loss experience is better than expected, the captive can retain the underwriting profits. This can result in lower insurance costs for members in the future.
In addition to group captives, another option for businesses is a cell captive.
A cell captive is similar to a group captive, but instead of pooling resources, each member of the cell captive has its own segregated portfolio. The parent company acts as the captive owner and hires a captive manager to oversee the cell captive.
The advantage of a cell captive is that it provides even greater control and flexibility over insurance coverage. Each member has a separate account within the cell captive and can customize their coverage to meet their individual needs. This allows for more efficient risk management and potentially lower costs.
One of the potential drawbacks of using a group captive is losing control over the insurance process.
While members have more control over their coverage, they must still adhere to the group’s overall insurance policies and procedures. Additionally, the captive manager hired by the parent company may have a significant say in how the captive operates.
Furthermore, members may not have as much control over the claims process as they would with a commercial insurance company. Since the captive is responsible for paying claims, there may be conflicts of interest between the captive and its members.
Understand the difference between renting and buying insurance with group captives.
To better understand the difference between renting and buying insurance with group captives, consider the following hypothetical example:
ABC Construction is a small business that specializes in residential home construction. ABC currently purchases insurance from a commercial insurance company for general liability and workers’ compensation.
Renting: ABC could continue to rent insurance from a commercial insurance company. This would provide them with pre-packaged policies that are easy to understand and manage. However, ABC would have little control over the policy and would be subject to rate increases and changes in coverage.
Buying: Alternatively, ABC could join a group captive for construction companies. This would provide them with more control over their insurance coverage and potentially lower costs. However, ABC would have to adhere to the group’s overall insurance policies and may not have as much control over the claims process.
When it comes to insurance, businesses have two options: renting or buying. In renting, businesses purchase coverage from an insurance company, while in buying, businesses create their own insurance company, also known as a captive. One type of captive is a group captive, where multiple businesses come together to insure the risks of their respective parent companies. In this article, we will explore the pros and cons of renting vs. buying insurance with group captives.
When we rent, rather than buy, some common motivations might include:
- Lack of expertise: Not all businesses have the expertise required to manage an insurance company. Buying a captive requires significant knowledge of risk management and underwriting, which may not be available in-house.
- Cost: Renting insurance can be less expensive than buying, especially for smaller businesses that do not have the resources to create their own insurance company.
- Flexibility: Renting insurance allows businesses to change providers easily, whereas creating a captive requires a long-term commitment.
Equally, there are times to buy, such as when:
- Tailored coverage: Captives allow businesses to tailor their coverage to meet their specific needs, rather than relying on a commercial insurance company to provide coverage that may not fully meet their needs.
- Cost savings: Captives can provide cost savings for businesses that face high premiums for their insurance coverage.
- Control: Captives give businesses control over their insurance coverage, allowing them to make decisions about their own risk management strategies.
Should you rent or should you buy? It depends on your insurance buying and risk management objectives. The attractions of renting include:
- Expertise: Insurance companies have the expertise to manage risk and provide coverage that meets your needs.
- Cost: Renting insurance can be less expensive than creating a captive.
- Flexibility: Renting insurance allows businesses to change providers easily.
Benefits of group captives for the future profits for contractor who is going through a succession process:
One of the benefits of captives is that they are owned and controlled by the businesses that use them. This means that the captive owner can tailor their coverage to meet their specific needs, rather than relying on a commercial insurance company to provide coverage that may not fully meet their needs. Captive owners also benefit from any underwriting profits generated by the captive.
Group captives are particularly beneficial for businesses that need coverage for workers’ compensation and general liability, as these types of coverage can be expensive to purchase on the open market. By pooling their resources, businesses in a group captive can access coverage at a lower cost.
Added benefit of being in a group captive for the next generation of the business:
In addition to providing cost savings, group captives can also be beneficial for businesses that are going through a succession process. By being part of a group captive, the business can ensure that insurance coverage will be available for the next generation of the business. This can help to protect the future of the business and ensure that it continues to thrive in the long term.
In conclusion, whether to rent or buy insurance depends on the business’s insurance buying and risk management objectives. Group captives can be an attractive option for businesses that want to manage risk, control their insurance coverage, and access cost savings. It is important to work with a captive manager who can help you choose the right type of captive and ensure that you are meeting all regulatory requirements.
FAQs on renting vs. buying your insurance with group captives for construction companies
What is a group captive?
A group captive is a type of captive insurance company where multiple businesses come together to insure the risks of their respective parent companies.
What is the difference between renting and buying insurance?
Renting insurance means purchasing coverage from an insurance company, while buying insurance means creating your own insurance company, also known as a captive.
What are the benefits of renting insurance for construction companies?
The benefits of renting insurance for construction companies include expertise, cost, and flexibility. Insurance companies have the expertise to manage risk and provide coverage that meets the unique needs of construction companies. Renting insurance can be less expensive than creating a captive, and it allows businesses to change providers easily.
What are the benefits of buying insurance for construction companies?
The benefits of buying insurance for construction companies include tailored coverage, cost savings, and control. Captives allow construction companies to tailor their coverage to meet their specific needs, and they can provide cost savings for businesses that have a high risk of claims.
What is loss experience?
Loss experience is the history of a business’s insurance claims. A business’s loss experience is taken into account when determining insurance premiums.
What types of risks can a group captive insure for construction companies?
A group captive can insure a wide variety of risks for construction companies, including workers’ compensation, general liability, and commercial auto insurance.
What is a captive manager?
A captive manager is a professional who provides management services to captive insurance companies.
What is a pure captive?
A pure captive is a type of captive insurance company that insures only the risks of its parent company.
What is a segregated portfolio?
A segregated portfolio is a legal structure used by captive insurance companies to separate the assets and liabilities of each insured business.
How does a group captive help a construction company with its risk management?
A group captive allows construction companies to pool their risks with other businesses, which can help reduce their overall risk and lower their insurance premiums. Additionally, construction companies can benefit from the risk management expertise of the group captive’s underwriters and risk management professionals.
Sam Veith
Sam Veith is a Sales Executive for Horton’s Construction Practice within its Risk Advisory Solutions Division. In this role, Sam is responsible for providing Horton clients with comprehensive, cost-effective and innovative solutions to meet their most complex, risk-related challenges and opportunities.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.
