We get it—having large or multiple insurance claims affects getting into a group captive insurance company or is impacting you while in one. It makes sense you want to minimize this risk, especially when money’s coming out of your business.
The obvious question is, “How do I minimize risk in a captive with all these claims?”
At ReNu Insurance Group, we have been in the industry with a focus on showing business owners how to own their insurance. We have over 100+ years of combined experience, placing over 130 captive clients. We know how captive insurance companies operate and benefit businesses like yours. That way, taking a risk with one doesn’t burn a hole in your pocket.
This article will discuss methods to minimize risk in your company and protect your business from claims in a group captive insurance company.
Table of Contents:
- Claim types you're likely to deal with in a captive insurer
- Pay attention. Be hyper-focused on these claims.
- Don't be afraid to ask your group captive for help
- Update your business's safety and risk management programs
- Prepare to prevent large or multiple insurance claims
Claim types you’re likely to deal with in a captive insurer
When you’re part of a group captive insurance company, you’re typically with like-minded individuals who want to succeed. Unfortunately, like losing someone you were close to in the family, bad things happen to good people such as yourself. You might be facing various types of insurance claims.
When talking about claims in captives, this means looking at any insurance claim, ranging from small to large.
Think of it in three categories:
- Frequency claims – This is the smallest bucket, but you will likely deal with these the most. Each of these claims is likely to be under $100,000. This gets paid off through the business owner writing the check.
There’s an old adage: frequency breeds severity. As in, when you receive enough frequency claims, you’ll eventually deal with more severe insurance claims.
- Severity claims – Typically, this layer accounts for any claim between $100,000-$250,000. The amount of your premium dedicated to this loss layer is about 11%. If you do not have a sufficient amount of premium to pay for the claim, the remainder is distributed to the other members of the captive.
- Catastrophic claims – These are large claims pushed onto the insurance company. Perhaps you’re a contractor with a liability policy, and you accidentally put a screw into a pipe that bursts, unleashing water onto a construction project with the fury of Poseidon. We’ll say this is a $300,000+ claim.
While the severity of these types of insurance claims may differ, one thing is certain: you want to avoid them as much as possible.
Do the right things to minimize your risk. Learn about the mistakes that caused each of your insurance claims and adapt so they don’t happen again.
If your business is good with safety and risk management, you might be wondering how you would do with a captive insurer. Take your assessment to see how your business would perform.
Pay attention. Be hyper-focused on the cause of these claims.
Hard-hitting question: Want to know the bright side of resolving these insurance claims? You get the benefit of making your business better.
The other businesses in the group captive want to see you improve. Your employees are going to be much safer because you fixed the problem. The result? Your captive insurance company will be more profitable since you’ve figured out how to mitigate the issue.
And your captive insurance company will really like you. That’s always a plus.
When you enter a group captive insurance company, the other members want to know if you’re lucky with avoiding insurance claims or if you’ve created procedures to minimize incidents.
Spoiler alert: they’re not going to gamble on you based on luck, especially when more claims will drive everyone else’s costs up, resulting in them asking you to leave.
This is why you want to pay attention to, adapt to, and document these risk management changes. It benefits the captive, it benefits your employees, and it benefits you. Documenting everything diminishes the chances of certain insurance claims coming back to haunt you.
Plus, it benefits your workers. When your workers feel safe, the quality of your business increases. Remember, it’s all about the people.
Don’t be afraid to ask your group captive for help
Compare this to the traditional market insurance companies, who won’t be knocking on your door to help resolve your problem. They’ll charge you more in premiums. And if you’re too much of a liability, the carrier won’t renew your policy. You’ll have to go to another carrier, who will charge you more in premiums due to your bad track record. That’s a huge problem.
In a captive, you will pay more in renewals based on the number of claims, but you OWN that responsibility. The interest on the captive side is to minimize those risks so everyone can benefit. Risk management leads to cleaner years. Cleaner years bring your premiums back down. Bringing your premiums back down adds to your financial happiness.
And we get it—asking for help can be tough. As humans, we want to figure things out on our own. When it comes down to it, that’s an extra hassle you shouldn’t have to deal with. You have resources within a captive that are more than willing to help you. After all, you’re not the only business that’s faced these problems.
This is why you have safety and risk management professionals who work for the various businesses inside the captive insurance company. And people have been in the same group captive insurance companies for years, even decades. You’ll have a risk committee you can call.
Captives want you to do better. The better you do, the less you pay. Period.
Update your business's safety and risk management programs
When a workplace accident happens, own your risk and take responsibility. Captives don’t like it when you don’t own your mess up.
Group captive insurance companies are actively trying to help you manage your risk and safety. They love it when you’re actively mitigating all types of insurance claims.
If you mess up, own it. Take initiative to improve your safety and risk management programs.
Prepare to prevent large or multiple insurance claims
When you join a group captive insurance company, the first couple of years are the most dangerous for money. Even if there are zero claims within those first few years and everything is as smooth as butter, you will inevitably face an insurance claim later.
Remember: captives are a risk financing mechanism. You need to have financial and workplace strategies in place.
We advise giving captive owners 3-5 years of solid underwriting profit before taking a dollar out. One of the ways to mitigate the captive is to leave your money in there.
Every year from when you start to 30 years later, you know your regular premium based on loss and expenses. You also know your maximum possible premium, which is typically 1/5 times your annual premium.
Let’s use this as an example: You’re paying $250,000 in annual premiums, and you have had a bad year with multiple claims. You could be assessed upwards of $100,000 to make up the difference. Thankfully, you have saved up that $100,000.
Think of it like a piggy bank labeled “in case of emergency.” You might have to break it. The best part is you won’t have to compromise your business’s capital.
Collateral
In case you don't know what collateral is when it comes to captives, it's money you’re putting up in case you don’t pay and is required to get into a group captive insurance company. This is done either through a line of credit or cash.
Covering the subject of collateral is something that can be complex. Check out our video on this very subject:
Say you have $80,000 in collateral and $150,000 in your loss fund without any insurance claims. That’s great! You can’t touch that money in the loss fund until the captive managers and regulators allow you to take the distribution.
You then get to year three and are allowed to take that year one surplus you saved up. Rather than taking the money out, you swap the collateral. This improves your balance sheet since your cash or line of credit is being returned or released based on how you paid it. That money is now in your captive as collateral, accumulating investment income for a few years.
Then, BAM, you have a bad year. Well, now you have enough cash from that prior underwriting profit to absorb that loss. There’s no stress because of how much you’ve accumulated over the years.
Does it suck you didn’t make as much money as you hoped? Yes. That said, it won’t affect the cash flow or balance sheet of your primary business.
How much can you expect to pay in insurance claims
This might surprise you to read since most brokers won’t get their hands dirty by helping with the nuts and bolts of your problem.
ReNu Insurance Group has no problem helping you, whether directly through us or bringing in subject matter experts. For example, we might not be experts in fleet safety, but we know people who are. We provide you with the expertise to bring to the table.
We also have an insurance calculator for you to use. That way you can see how much you would need to invest to get into a captive, how much you can make in underwriting profit, and what you would have to pay during a bad claim year.
While you’re at it, read our article on how the captive approach to claims management differs from traditional insurers. That way, you have a better understanding of how each market does its claims management.
Topics:
