22 March 2023Analysis

III highlights value of group captives

Group captive insurance can be a source of value for certain companies in these inflationary times according to the Insurance Information Institute (III).

A form of self-insurance for organisations with specific attributes, a group captive can help lower the costs and improve cash flow for certain risks, with the added benefit of returning unused loss funds and income to members through dividends, the III pointed out in a new executive brief, ‘Group Captives: An Opportunity to Lower Cost of Risk.

Group captives have existed for decades, and each owner makes a modest initial capital contribution. “The lines of coverage written typically are those with more predictable losses, such as workers compensation, general liability, and automobile liability and physical damage,” says the brief.

Group captives recruit safety-conscious companies with better-than-average loss experience. Because each member’s premium is based on its own most recent five-year loss history, membership often results in reduced insurance premiums. This contrasts with commercial carriers, who base their premium on a number of factors including industry-wide loss experience. According to a recent study, almost three-quarters of new bound policies in group captives have lower costs than the members’ previous plans. In fact, roughly 30 percent of new policies saw a savings of 20 percent or more. The increased focus on pre-loss risk management and post-loss claims management can drive members’ premiums down even further by the second and third year of membership.

The III paper notes that group captives also tend to benefit members through greater financial flexibility and protection against losses. “This is due to greater control of and transparency into insurance program costs,” the paper states. “Group captives can also help lower costs via greater member involvement in the insurance process, including oversight of claims handling and reporting. These lower costs can improve cash flow for certain risks, with the return of unused loss funds and investment income via dividends.”

The group captive model can also help to control spiralling litigation costs, the paper notes. Attorney involvement in commercial auto claims – particularly in the trucking industry -- drives expensive litigation and settlement delays that inflate companies’ expenses. A 2020 report from the American Transportation Research Institute found that average verdicts in the US trucking industry grew from approximately $2.3 million to almost $22.3 million between 2010 and 2018 – a 967 percent increase, with the potential for even higher verdicts looming.

Group captives can help control these costs through careful claims monitoring and review, often through providing additional layers of support that improves claims adjusting effectiveness and efficiency. “Given that members’ premiums are derived from their own loss history, this is yet another way that they are able to lower their premiums, proactively managing and controlling the losses that do occur,” the III report notes. “Group captives can provide a viable way to protect companies across several lines of casualty insurance. Their prominence is likely to grow as economic and litigation trends continue to increase costs.”