In terms of risk management practices, captive insurance is hardly the new kid on the block. Yet, faced with tightening carrier restrictions and ever-increasing premiums, a growing number of organizations are embracing this alternative risk management approach to regain command over costs, market stability, and loss management. At their inception, captives were most viable for large, heavily capitalized companies capable of withstanding significant losses.¹ However, evolution has allowed for greater application and group captives have created opportunities for small- and mid-sized companies to get in on the action. In this article, we’ll explore the definition and concept behind group captives to help you understand this approach and its potential benefits for your organization.

A group captive is an insurance program in which multiple organizations collectively own, fund and operate an insurance company to manage the risks of member companies. Participation in a group captive is particularly advantageous for small to mid-size businesses that may lack the resources to establish a captive on their own but may enjoy similar advantages by joining forces with other like-minded companies.

Each group captive member contributes to funding loss reserves and has a say in its operations to mutually benefit one another. Instead of paying premiums to a commercial insurance carrier, the members invest in their captive insurance company. Their premiums are based on their individual loss experience, giving them control over their costs.

This collective ownership allows members to collaborate on important decisions related to underwriting, loss control, operations, reinsurance coverage, and risk management services. As expenses are shared among all group members, the operating costs for group captives tend to be lower compared to other types of captives.

In the world of group captives, composition is key. Membership matters since a group captive is a mix of companies sharing risk. The two primary distinctions are heterogeneous and homogeneous.² Preferences are often based on your company’s risk profile, industry, loss history, and risk management needs.

Heterogeneous group captives are characterized by membership composition from diverse industries. This arrangement allows for a broader risk pool, as companies from different sectors share risks. The advantage of this approach is that it can provide a more extensive range of perspectives and experiences, potentially leading to better risk management strategies and reduced overall risk for each member. Moreover, the impact of industry-specific fluctuations may be balanced out by the diversity of companies involved.

By contrast, a homogeneous group captive is comprised of member companies from the same industry. This arrangement enables a more focused and specialized approach to risk management by uniting businesses with similar risk exposures and challenges. Since all members share common risks, they can tailor their strategies and loss control efforts more precisely to address industry-specific concerns. Additionally, collaboration among industry peers can foster the exchange of best practices and valuable insights.

When selecting a group captive, assessing your company’s unique situation and objectives is crucial. This includes factors such as the level of risk diversification desired, industry-specific risks, the potential for shared knowledge and expertise, and how well your risk management needs align with the specific group’s structure.

Group captives offer a range of applications, including workers’ compensation, commercial auto, and general liability exposures. The benefits they provide are numerous and often include:

Due to their complexity, deciding whether a group captive is the right choice for your organization requires careful consideration. Group captives must be meticulously structured to meet legal, tax, and regulatory requirements specific to the domicile in which they are licensed.

Apart from navigating the intricate regulatory landscape, the fundamental design of the captive must be actuarially sound to ensure its long-term viability and compliance with domicile expectations. A thorough feasibility analysis should be conducted before forming or joining a group captive.

At MJ, we thrive on helping organizations explore alternative risk-financing solutions that safeguard their assets and bolster their financial performance.

Ready to enhance your risk management strategy? Contact us today.