This is one of the more common questions that I get from many of our larger premium clients. Almost always, I answer with a definitive yes. Any company that has premiums in excess of $250,000 should be considering creative and alternative ways to save money on their workers comp insurance costs and get a better return for their premium dollars.
Some entrepreneurs are afraid to consider a self-insured captive program because they think that they have to become experts at workers compensation insurance. I’ve seen several business owners shy away from such a plan because it’s different from what their local agent has ever discussed with them. The best part about these plans is that the business owner doesn’t have to be knowledgeable about workers compensation to enjoy the potential rewards of the program. That’s what they are paying the insurance carrier for.
The simple truth is that these entrepreneurs built their business by taking risks to grow their company. A self-funded work comp captive program is built on the same principle: A company that is willing to share in the risk of workers compensation claims, can also share in the profits as a result. The trick is getting the plan design right and controlling claims by reducing worksite risks.
Before we get into the nuts and bolts of such a program, let’s first get a basic understanding of a self-funded captive program. Some agents like to explain a captive as a way of forming your own insurance company, which is a good way to think of it. Instead of complaining about all the money they pay to an insurance company for workers compensation coverage, now a company is paying a part of that premium to itself to fund losses. As the reserve fund builds, the funding mechanism creates profits and return.
A self-funded captive program is also called a single-parent captive, which helps identify the difference between this program and a traditional captive. Multiple insured’s are placed in a traditional captive and they may or may not share in the profits/losses of the plan, depending on how the program is set up.
A self-funded captive program will have only one company in the program and they will always share in the risks and rewards. By strict definition, a captive is an insurance vehicle that is owned by its policyholders. However, some parent captives may have segregated cells underneath them which basically act the same as the parent captive.
What many of our policyholders enjoy the most in this type of program is the thought that now they are paying the insurance company for their expertise, instead of just premium. In a self-insured captive program, the business and the insurance carrier are truly working together. Both are equally motivated to be as responsive to claims as possible and to do everything possible to get employees back to work quickly. Think about a captive program from the carrier’s side for a moment … while their inherit risk is reduced, their potential profits are going to be heavily based on claims.
The insurance carriers that specialize in single-parent captives are truly loss control specialists. Some of the best claims management people in the industry help run and manage these programs and the loss statistics show dramatic results.
Obviously there is a start-up cost associated with a self-funded captive and a business should only consider this program if they have the budgeting capability to be prepared to pay for claims and not strap their daily business. The actual start-up amount required and the pricing on a program will vary from company to company and is based off a company’s past insurance history and claims costs for workers compensation. It is also important to note that these plans are considered a major commitment from both the insured and the carrier, and they commonly are written on 3-year contracts as opposed to a traditional annual workers compensation policy.
These policies also carry a minimum and maximum cost associated, which offers protection to the insured should they suffer losses that exceed any reasonable expectation. The carrier is liable for any losses that exceed the set maximum on the policy, which does help a company budget appropriately and understand their worse case scenario..
Here’s an example so that you can have a little more clear picture of how a program works:
Company A currently has a policy on guaranteed cost (meaning the carrier pays all the claims) that is around $5,000,000 per year. They average between $1.5-2 Million in claims per year, which is an acceptable average ratio.
With the self-funded captive program, Company A would have a minimum premium of $1,734,343 and a maximum of $7,307,205. Their 95% actuarial projection is $4,689,184 … meaning that the insurance carrier would expect them to pay premiums at or below this figure 95% of the time. The startup deposit would be $553,260, which is much lower than the average startup amount (15%) on a guaranteed cost program.
As you can see from this example, there is no guarantee this policy will save Company A money and, if the losses were exceptionally bad, could end up costing more than a traditional policy. However, there is a 95% chance that this program saves at least $300,000 … with a potential maximum reward of saving $3,250,000 if they experienced a claim-free year.
Workers compensation captives are an amazing vehicle to reduce the cost of workers compensation insurance for premium greater than $250,000 per year. There are additional hidden advantages associated with owning an insurance captive that make them even more attractive with regard to wealth accumulation and estate planning. However, that’s another conversation for another time.
Workers Compensation Shop is a national P&C Agency specializing in workers compensation insurance.
