Anne Marie Towle is global captive solutions leader at Hylant & Kathy Freyman is chief innovation officer at Inspirien
26 November 2019

To affinity and beyond

Group captives are formed when a group of individuals or entities come together to jointly own an insurance company. Sometimes they are sponsored by industry associations for the benefit of their members, hence the name: association captives.

“The optimal scenario minimises expenses and maximises underwriting profits for the membership.”

Association captives have been in existence for years and their use varies by the affinity or industry association seeking alternative risk-financing options.

Affinity groups
Does pooling risk with people that share an affinity make for better risk outcomes? These are people who share beliefs, values and life experiences, so does it make sense to apply this lens when evaluating their risk?

In a group that underwrites primarily healthcare providers, members are grouped and rated according to various provider classes (eg, orthopaedics, family medicine, etc). Although it makes sense that they would be exposed to the same risk, their approach may vary significantly based on their values.

For captive owners and members who are accountable to each other for their risk outcomes in terms of claims related to accidents or injuries, it’s likely they would prefer to share risks with those they know and trust. This is where the affinity model comes into play.

Affinity groups could include anyone with for example the same gender, race, religious background or ethnicity. Many of these groups have their own associations, such as the American Association of Physicians of Indian Origin; Association of Black Women Physicians; and Association of Croatian Professionals. These associations bring members together as a larger collective group to improve their buying power, enable sharing of resources and to leverage partnerships.

Benefits of sharing
The benefits of leveraging an affinity association for a captive include:

  • Access to membership to achieve the critical mass needed for minimum funding requirements;
  • Diversification of risk: the larger the group, the greater the spread of risk;
  • Tailored coverage for their membership’s specific needs;
  • Increased loss control and risk management best practices for all members;
  • Long-term lower costs due to group purchasing power for excess/reinsurance coverage; and
  • Return of underwriting profits to the membership

A variety of risks can be placed in a group captive, and healthcare companies have looked at captives for medical malpractice, medical stop loss and other related risks.

The process for setting up an affinity group captive is shown in Figure 1.

Costs and fees
In terms of pricing, the frictional costs for association group captives are typically broken out and may include any, or all, of the following:

Insurance carrier’s front fee;
Captive management fee;
Audit fee;
Actuarial fee;
Claims supervision;
Loss control services;
External costs including taxes, actuarial, unique domicile charges; and
Reinsurance charges for excess of loss, and/or aggregate protection.

Ideally, association group captives have expenses in a range of around 20 to 35 percent of the gross written premium. Figure 2 demonstrates the approximate split-out of costs for an association group captive, showing 30 percent total estimated expenses and 70 percent total estimated losses.

The optimal scenario minimises expenses and maximises underwriting profits for the membership.
When considering becoming a member of an affinity group captive, people should account for:

  • Who controls the facility, and are there any conflicts of interest?
  • What are the entry requirements for new members?
  • What does an exit strategy look like as a member?
  • What is the minimum time required for participation in the affinity group captive?
  • How are premiums determined for the members?
  • Does the affinity group captive offer risk and loss control services?

With the answers to these questions established, a member can seriously consider joining the association group captive.

Kathy Freyman is chief innovation officer at Inspirien. She can be contacted at:  kfreyman@inspirien.net Anne Marie Towle is global captive solutions leader at Hylant. She can be contacted at:  anne.marie.towle@hylant.com