In a Hardening Market, Captives are Worth a Closer Look: 3 Keys to Selecting the Right Partner

February 19, 2021


Organizations across industries are facing one of the most challenging insurance markets in decades. This hardening market is a result of rising claims costs driven by social inflation and catastrophic claims, combined with historically low interest rates and other financial factors. It’s created stress across lines of coverage, but the challenges have been the most pronounced in property & casualty and excess liability. As a result, organizations in a variety of industries are facing high premiums – if they can secure coverage at all.

In light of these challenges, many organizations are considering alternative risk transfer solutions outside traditional insurance products. Alternative risk market tools like insurance pools, parametric insurance and integrated risk programs can be meaningful solutions in a hardening market. For many companies, one alternative risk structure worth special consideration is a captive insurance program.

Captive Insurance Defined

Captive insurance is a form of self-insurance in which an insurance entity is created by an individual company (single parent captive) or a group of companies that joins together to form their own insurance company (group captive).

Rather than transferring all insurance risk to third-party traditional commercial carriers, a captive (single parent, group and/or hybrid captive structure) assumes a level of calculated risk that is priced (quantified) by a third party actuary. The banding together of affiliated companies (single parent captive) and/or unaffiliated organizations (group captive) provides risk distribution, risk diversification and ample spread of risk to operate a viable insurance company. Captive participants can contribute to a shared pool of resources rather than paying 100% of premiums to a commercial carrier. Through sound claims management and loss control, organizations can lower the costs of claims, and therefore reap financial benefits through the captive facility.

With this structure a captive insurance program offers several benefits:

  • Consistency – While traditional insurance premiums are surging and coverage is increasingly hard to secure in the current hard market, captives offer more predictable and stable pricing.
  • Control – Captives remove many market factors from pricing. Cost is not based on what insurance companies think they can charge, but rather what organizations predict their losses will be.
  • Customization – Captives allow an organization to build more specific coverage for certain lines at certain premiums, rather than being forced into off-the-shelf policies from insurance companies. They allow for a more comprehensive approach to risk and long-term strategic thinking.

In many cases, utilizing a captive insurance program helps organizations take a more comprehensive and strategic approach to risk. They have more options in how they finance and control various risks and exposures and can take a long-term view. It lets organizations make one five-year decision rather than five one-year decisions.

What’s more, it creates added incentive for organizations to pursue additional risk management solutions such as loss control, enhanced safety processes and more. Organizations in a captive have an opportunity to share best practices, resources and more in pursuit of reducing claims and lowering costs.

Finding the Right Captive Insurance Partner

As organizations consider the switch to a captive insurance structure, it’s important to approach the process in the right way. In most cases, a broker can be a vital partner in navigating the transition to a captive insurance program. Yet not all brokers offer the same set of services and expertise, especially when it comes to captives and alternative risk transfer. Here are three traits to look for in a true partner in determining if a captive is the right move for your organization.

1. An Objective Perspective

Many brokers have a vested interest in pushing clients toward or away from captive insurance structures. Smaller brokers typically don’t have the capabilities to handle captive services in-house and will have to find an outside consultant to oversee the process. Larger brokers may have the capacity to tackle structuring a captive, but most charge a premium for the service. In either case, the client ends up picking up additional costs. Large regional brokers like Conner Strong & Buckelew take a more consultative approach. Captive insurance is one of a host of risk management solutions, and it’s presented as an option because it could benefit the client’s business, not the broker’s.

2. A Collaborative Approach

If the captive approach makes sense for the business, the right partner can help move through the process of establishing or joining the captive. It can be a complex process that typically requires a combination of execution and education in helping clients make the right decisions. That approach necessitates a deeper understanding of a client’s business goals and priorities with an eye toward key industry considerations.

3. A Track Record of Success

Building a successful captive insurance program requires partnership. That partnership extends beyond the organization and the broker to include captive managers and administrators, actuaries, tax experts, auditors and more. These partnerships must also be objective and collaborative to deliver the best outcomes. The right partner should have a vetted network of support in these areas and a proven track record of helping similar organizations make the transition to a captive structure.

Making the Switch in a Hard Market

Today’s hardening market has prompted organizations of all shapes and sizes to rethink their approach to risk. In situations where traditional insurance has become untenable, captives are an option worth exploring. Many organizations that have already made the switch are now finding increased control and savings as tough market conditions persist. The right broker partner can help your organization find creative solutions in a challenging market.

To learn more about captive solutions in a hardening insurance market:

Please contact a Conner Strong & Buckelew representative.

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Captive Services, Risk Management

Practice Leader

Timothy J. Gosnear

Executive Partner, National Accounts

Practice Leader

Roger Ladda

Partner, National Captive Practice Leader

25-plus years in the alternative markets/captive industry