We hear this question a lot and our best response is, “It depends.” We know this isn’t the answer you’re looking for, so we will explain all of the potential answers as well as anyone can.
There are several things that you will need to consider and decide before joining a captive. For example, which kind of captive do you want to join? Are you a good candidate for that type of captive, or would another type be a better fit? What it comes down to is, are you ready for this? Are you “captive ready”?
At ReNu, our expertise centers on finding the answers to these questions and then, if the answers point to captive being your best choice, paving the way to you becoming a captive owner and reaping all the benefits that go with it.
This article broadly explains the questions you will need to look at and be prepared to answer before making an informed decision on whether to join a captive. These questions are then discussed in more detail in a separate article about how the captive underwriting process works.
And make sure to check out our video that covers how to join a captive:
Why can’t I just join a captive?
Once a business joins a captive, the business owner owns an insurance company—and the risk that goes with that. Before making that leap, there are several vital considerations to be taken into account, including:
- Whether your past five years reflect the performance of a profitable captive owner;
- If you have a good insurance history with a low claim rate, is it because of careful risk management or luck?
- Which type of captive do you want to join?
What does the risk committee look at regarding the past five years?
To determine whether a business would have been a profitable captive owner over the past five years, a business owner needs to get a five-year pro forma (that is, an examination of whether their premiums have exceeded their claim expenses over the past five years). If the company’s premiums have exceeded claim expenses, then the business is seen to have proven the ability to achieve the kind of results that are required to be a profitable captive owner.
Note: If a business is looking to join a pure (single-parent) captive, then a more robust feasibility study will need to be conducted.
How is it decided whether a good insurance history is repeatable or just lucky?
If the company is found to have an excellent insurance history (that is, premiums consistently exceeding claim expenses), then the risk committee will ask how they manage the different risk types associated with their business. The most favorable response is to show that the business has established processes, procedures, and standards that reflect lessons learned and best practices for effective risk management, and that facilitate training and handoff of the associated responsibilities. If a business doesn’t already have a documented set of processes and procedures in place to support its risk management program, it is highly recommended that they be documented before the business owner applies to join a captive.
How do I decide which type of captive I want to join?
As discussed in, What is captive insurance?, there are several different types of captives with varying degrees of flexibility. For example, a pure (single-parent) captive can make its own decisions without having to align with those of other companies the way a member of a group captive does, but it requires a larger capital investment and greater collateral than a group captive or a cell captive. To determine the best type for your business, you will need to decide what degree of flexibility you want and what kind of capital you want to invest.
Okay, so once we figure all that out, what happens next?
Once the business owner has considered all the questions discussed above they bring the answers to the risk committee (group captive) and/or the captive manager (cell captive) to confirm that they are a good fit.
If the initial results indicate that the business may be a good candidate for the chosen type of captive, the business owner is asked to submit an application and the risk committee/captive manager conducts the captive underwriting process.
If the underwriting process results in a favorable outcome, then the risk committee/captive manager issues an offer to join the captive. The invitation indicates the minimum initial investment that will be required—this is effectively the premium for the first year, and, to start off with, it is typically equivalent to what the business owner has been paying in their traditional insurance (likely to lower over the first two or three years).
The offer also advises the potential captive owner of the maximum possible capital/collateral obligation for the first year. Then every year after that, the captive owner is advised of what their maximum possible financial obligation will be for that year.
If the risk committee or the captive manager makes an offer to join and the business owner accepts, then the business owner wires their investment and is now a captive owner. As such, they receive an invitation to attend the next board of directors meeting for the captive, where they will meet the other members of the group captive and learn the details of how their captive is run.
Is my business even large enough to join a group captive?
As you have seen in this article, there are several things to take into account before deciding to join a captive. You’ll want to look at the various types of captives, and you will need to take a close look at your insurance history and your current risk management program and possibly do some work to get things ready before you apply. But before doing all that, the next question you may be asking is whether your business is even large enough to be part of a captive.
Read Is captive insurance suitable for businesses of all sizes? to get a better idea of whether your company would be a good fit for a captive, and whether a captive would be a good fit for you.
At ReNu, our insurance specialists are available to discuss any questions you might have.
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