What's a captive?
An insurance company owned by the businesses it covers. Instead of paying the insurance company and hoping, a group of members owns the company together and covers each other.4
A captive is not a coupon. First year, you put money in. If your crew stays clean, money can come back. If it doesn't, it won't. That's the whole deal.
How the money moves
Think of insurance as a bucket of money. Every year, everyone pays in. Claims come out. In the regular market, whatever is left belongs to the insurance company.
In a group captive, the bucket belongs to the members. The premium starts from the losses the group expects to cover, then adds expenses and reinsurance.3 Most group captives pay out what's left after a good stretch as dividends or other distributions to members.4
Licensed professionals run it. It's a long game, not a quick fix.
Both sides, same size
What it can do
- Pricing leans on the group's own record and expected losses, not the whole market's.23
- Members are placed in risk categories, with credits for better protection and loadings for riskier work.3
- If the group's claims come in low, money can come back to members. It takes years: one report puts payouts about six or seven years out.14
What it costs you
- Year one usually costs more. There's collateral, and members typically put in starting capital; one model sets it at 2.5 times the first year's premium, part paid in and part on call.134
- You share losses with other members. Members who miss the group's safety standards can be voted out or not renewed.4
- It's hard to leave and slow to start. Exit rules are set in advance, and penalties for leaving early are recommended. Forming a captive can take years.4
Two more things before you get excited
The tax side has rules. Premium deductions depend on the captive passing the IRS tests for risk shifting and risk distribution.4
Not a tax trick. If anybody sells it as one, walk.
It's work. Members hand over a lot of financial information, and someone has to serve on the board and committees.4
You'll show your numbers and you'll sit in a meeting. Bring donuts.
Questions to ask before joining
- Who controls the captive, and does anyone running it have a conflict of interest?
- What are the rules for joining, and for leaving?
- How long do you have to stay in, at minimum?
- How are each member’s premiums set?
- What safety and loss control will you be required to do?
From Captive.com's list of questions for any group captive.4
Ask every one of these out loud, before you sign anything. If an answer takes forty minutes, see Rule 9.
Why this study exists
A group captive needs enough members, with a broad enough spread of risk, before it can start.2 One analysis suggests nine to twelve starting members work better than five.3 That's the hard part for a contractor on their own. The Captive Census counts who's interested first, by trade and region, so groups can find out whether there are enough of them to be worth a real review.
Now the part the brochures skip. Read this half as hard as the first half.
Whether a captive fits your company is a question for licensed professionals looking at your real numbers. We can't answer it, and we won't pretend to.
I'm not licensed to tell you what to buy. I'm licensed to hold a clipboard. Talk to a licensed pro before you sign anything.