Chapter 06
PROCESS TO JOIN A GROUP CAPTIVE
When considering a move to a group captive insurance program, the decision-making process is much different than when renewing your business insurance in the traditional market where price and service level are generally the driving factors. This is because a group captive program is a different method of purchasing insurance; one that also establishes a separate mechanism for growing and preserving financial assets outside of your existing business.
In addition to looking at the premium and claims payment history of a business, the captive manager will look at a number of other operational factors including:
- Length of ownership
- Financial strength
- Business Standard Industry Classification, (SIC Code)
The full analysis and qualification process can take two to six months. For this reason, it is not recommended that the evaluation of a group captive program be conducted in conjunction with a business’ regular annual insurance renewal.
When determining the value and projected annual premium with a group captive program, it is important to understand that conventional bidding and negotiation of rates is not part of the process. The insurance carriers don’t use the rates filed with regulatory agencies but rather establish premiums developed by the actuarial “loss pick”. These determinations use five years of claims and premium data to determine the premium amount and claims fund deposit needed to protect the other members of the captive. These actuarial forecasts tend to be conservative (more expensive) in the early years of captive membership because, as most business owners are aware, insurance companies have differing claims reserves and payment practices. As a business ages in a captive program the claims experience becomes more predictable because the claims reserving and payment strategy is set by the captive owners. This results in more significant cost savings and asset growth over time.
The process of joining a captive will take between three weeks to two months depending on the complexity of the business considering the option and the workload of the captive management company.
CAPTIVE ENROLLMENT PROCESS:
| Action Step | Duration | By Whom | |
|---|---|---|---|
| 1. | Collect 5 years of claims and premium history | 1-2 weeks | Business owner |
| 2. | Prepare a pro-forma | 2 days | Insurance broker |
| 3. | Submit to the captive for actuarial review and approval | 2 weeks – 2 months | |
| 4. | Review captive memorandum and other documents | 1-2 days | Done by the business owner |
| 5. | Review the captive cost and premium calculation* * Captive financials should be reviewed at this time | 2 hours | Presentation done typically by the broker and captive manager |
| 6. | Purchase captive stock and make the first captive premium payment | Upon inception of the insurance coverage | |
| 7. | Post collateral in either cash or a letter of credit | Up to 30 days following the inception of coverage |