Experts explore the benefits of group captives

Once the mainstay of very large companies, group captives are fast becoming part of the mainstream of risk financing solutions, said Emma Sansom, Group Head of Captives at Zurich Insurance Company. That’s partly due to affordable cell captive structures, an increasing awareness of the benefits the captives provide and improved availability of data that makes managing risk portfolios easier through more informed decision-making, she added.

Sansom and other experts discussed the benefits and challenges of forming and participating in group captives during a webinar hosted by Captive Review magazine.

It isn’t the answer for everyone, but for “like-minded organizations with high standards of risk management built into their DNA, a group captive could provide an appealing solution to a number of challenges,” Sansom said.

She pointed to a report by the Insurance Information Institute and Captive Resources LLC that show organizations participating in group captives on average suffer 48% fewer fatalities, 39% fewer lost-time claims and, overall, 22% fewer workers compensation claims.

Participation lags in Europe

Zurich’s U.S. group captive unit manages more than 45 programs with 3,200 member companies in North America across a range of industry segments, Sansom pointed out.

Such widespread acceptance isn’t the case in Europe, the panelists agreed.

“There’s a call to arms for the European captive industry to promote this type of structure and reach out to companies that might benefit from it,” Sansom said.

“The European market is very different,” said Oliver Schofield, CEO and Managing Partner at captive consulting firm RISCS CWC. “The penetration we are seeing in North America is not replicated in Europe in terms of the volume. There are some vehicles,” he said of group captives in that part of the world, “but you are literally counting the numbers on the fingers of two hands.”

Despite the tepid interest in Europe, “I feel quite strongly that group captives can bring an element of stability, of certainty and flexibility to the insurance purchasing of corporations around the EU,” Schofield said.

Benefits of group captive participation

More widespread use of group captives in Europe would afford risk managers and their organizations a way to team with other companies and take advantage of the benefits the arrangement provides without having to establish a single-parent captive, the panelists said.

A group captive allows various related or unrelated businesses to come together and form a collective insurance company, explained Dawn Hiestand, Zurich North America’s Executive Vice President and Head of Captives. “While small and mid-sized businesses often lack the scale and resources to form a single-parent captive, they can enjoy many of the same benefits by joining forces with other companies,” she said.

Hiestand pointed out that participating in a group captive provides members with greater oversight of their insurance programs, cost savings and a share of investment income, among other benefits.

The group captive market in North America has grown consistently since the mid-1980s, according to Jeff Matney, Senior Vice President of Innovative Captive Strategies, a captive management company. “It comes down to value,” he said, and group captives allow middle-market businesses owners paying around $300,000 or more in premiums for workers compensation, commercial general liability and auto insurance to participate.

Participation in a group captive can protect members from insurance market swings in pricing, Matney said, by allowing them to establish rates based on their individual experience and performance. “The premium expense is generally one of their top three line-items,” he said of companies considering joining a captive. “It allows them to take control of that cost by owning a portion of the insurance company…It turns into a long-term business strategy.”

“The premiums that a member pays ought to reflect their own exposure and their own experience,” said Joshua Nyaberi, Head of Captive Fronting for Zurich Insurance Company. Members will pay different premiums that reflect the potential to recover their own losses, which should mitigate the need for others to help if the member’s loss fund is exhausted, he noted.

A profitable and sustainable captive requires like-minded and best-in-class partners, Nyaberi said. “Even if you are competitors in an industry, you become partners in risk management,” he said. “The safer you are…the safer your partners in the group captive are. This is critical in building a community of trust.”

It is an approach that has been proven to work over the decades that group captives have been in place, the panelists agreed.

“The North American approach has been successful for many, many years,” Schofield said. “It’s absolutely valid for Europe and elsewhere in the world.”

Addressing challenges to formation and participation

Among the barriers that have to be overcome in Europe is the fear of running afoul of anti-competition laws, particularly in the UK, when participating in a group captive, according to Schofield. And there are cross-border challenges to complying with different legal systems and insurance regulations, he said.

The biggest concern that group captive members have to overcome is accepting the mutualization of risk, Schofield said. Potential members generally feel their risk management is top-notch and their exposures are well-protected, he added. “If I’ve got the best risk in the world, why do I want to jump into a pool with people who I think don’t have the same approach to risk management?”

Time is an issue as well, he noted, as it takes from 12 to 24 months to establish a group captive in Europe. “That’s a huge time commitment.”

“The role of the consultant becomes critically important to ensure that they can navigate the potential members of a group safely and effectively through all these challenges,” Schofield said.

Insurers provide critical services

Nyaberi pointed out that captives need traditional insurers to provide services such as fronting arrangements, underwriting and claims functions. And, captives’ policies must be written by an admitted or licensed carrier. “An effective and professional fronting partnership will simplify issuance of insurance policies across multiple lines of business,” he said.

“The creation and operation of a group captive is a journey,” Nyaberi said. When it matures, the fronting insurer can help close old underwriting years or, in some cases, shut down the group captive when it has served its purpose. “This happens through commutations whereby the insurer assumes the captive’s historical liabilities and terminates all the insurance contracts,” he said.

Webinar was hosted 13 July 2023 by Captive Review