Who Is in Control When It Comes to Your Insurance?
Historically, the construction industry has been the first to feel the effects of a “hardening” insurance market and the last to enjoy the benefits of a “soft” insurance market. What’s worse? For most contractors, insurance is their second largest expense behind payroll, and this expense is not only growing, but the control over it seems to be diminishing. In fact, the Property Casualty insurance market is currently experiencing its 23rd consecutive quarter of overall rate increase.
Unfortunately, the construction industry continues to experience above average rate increases. Contractors commonly complain about insurance premiums being frustrating, not rewarding safety records, and lacking control.
The Group Captive Insurance Solution
So, what can be done? A popular solution among contractors is Group Captives. This type of insurance allows contractors to escape the unpredictable standard insurance market, stabilize their expenses, and even turn their insurance expenses into a profit center through risk management and performance controls already integrated into their business operations.
A captive insurance company allows owners to benefit financially by retaining a controllable layer of claims through safety and risk management while securing reinsurance for unpredictable and infrequent claims. The premium paid to the captive funds the retained layer and any surplus is received in distributions, creating a new profit center.
Captives often get falsely represented as a risk pool. A group captive is set up as an equity-based model, where your specific premiums are set aside for your company’s claims.
As with any insurance company, captives must show the ability to share risk with unrelated entities (“risk sharing”). Well-structured group captives can minimize the amount of risk sharing with a commitment to underwriting integrity by funding expected claims correctly on the front end and ensuring that only the best companies are allowed in the group.
It is worth noting that risk sharing also occurs in the traditional insurance market among all insured parties who use a particular carrier. As a result, contractors with favorable loss experience in the market are still subject to increased renewal rates on certain lines of coverage due to underperforming companies that are insured by the same carrier. In a group captive, there is transparency and partnership with the companies in the captive, fostering a culture of accountability between insureds that is absent in the traditional market.
Benefits of Group Captives
While the financial upside is significant, most contractors realize that the benefits of a group captive extend far beyond premium reductions and profit distributions. Every business is at a different stage of its risk management journey when they first join a captive. Some are robust, well-oiled machines that are fighting and avoiding complacency, while others have had their “luck” run out and are seeking to formalize their practices and create repeatable success. No matter where an operation falls on the risk management spectrum — from compliance-based safety to true learning organizations — group captives can serve as a peer group that promotes improvement.
Learning from other like-minded companies, captive members are also afforded an immediate support network to share experiences, losses, frustrations, and solutions so that each member can learn from the events of another. The group sharing and accountability coupled with the ability to recapture premium dollars puts a heightened emphasis on performance and safety. For those who get excited about the opportunity, the success stories are abundant.
Holmes Murphy Expertise
As with any business decision, captives are most certainly not for every contractor. If you have any interest in a full captive education, our team at Holmes Murphy can help discover if this solution could work for you. All you have to do is reach out.
Published on: 08.17.23