Companies both large and small are struggling to manage the cost of traditional insurance. Many business owners are now looking to captives as a possible solution. Captives are certainly an option worth considering, but may not be a fit for all kinds of businesses.
In the past many companies were too small to even be eligible for a captive, but this risk management option is now becoming more widely accessible to all types of businesses. The average account size of most captive members has shrunk in recent years.
When you boil it down, captives essentially come in 2 basic flavors:
Individual Company Captive
This type of captive is suitable for very large corporations willing to go through the expense of setting up their own insurance company.
Individual Company Captives require a lot of time and effort in the organizational stage, plus management once established. Capitalization is also needed as is the ability to withstand adverse loss experience.
This is a captive where more than one company pools their risks. These are referred to as heterogeneous and homogenous groups: heterogeneous, when the industries of the members vary, or homogeneous when members are all in the same industry.
Group Captives are easier to transition into since it is typically the company joining a group that is already in existence. The initial organizational phase is eliminated, and there is a management structure already in place. Capitalization is needed, but not as large as an Individual Company Captive, since risk is shared with other members of the group.
Both structures require “fronting insurance” companies to satisfy states’ requirements for compulsory Workers Compensation and Auto Liability coverage. Generally a Third Party Administrator (TPA) is engaged to handle the claims.