Are Group Captives Right for You?

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Group captives are one important form of workers compensation insurance. These options allow members to join together to increase purchasing power and reduce risk. They help to improve cash flow and lead to better income tax benefits. However, this type of insurance option isn’t the right solution for everyone.

It’s important to recognize that there are multiple types of group captives. They are either homogenous, or only open to a specific group of members, and heterogeneous, or open to a variety of members. Within these two classifications, there are many minor differences from one agency to another. How can you tell if this option is right for you?

Determine Your Ability to Share Risks

Each member of the policy should be able to share the same amount of risk. You, as a member, must understand the magnitude of the risk as a whole and also on an individual basis to make a well-informed decision. It may also be a practical idea to determine how well other members can handle that risk.

Analyze the Potential Costs

Some of the cost components of a group captive aren’t completely transparent, at least up front. Search out all the costs associated with the captive, including tail funds, member bankruptcies, and similar facts.

Tally Up the Security Post

Each member of the group is required to post security at a higher rate than for the more traditional deductible or retrospective options. You can expect to be responsible for about 140 percent of estimated losses. This security requirement will remain in place for three to four years.

Understand the Difficulty of Exiting

It’s fairly easy to switch from one commercial insurer to another. This is not the case when you belong to a group captive. A variety of factors, including open claims, timing, buy-out penalties, and assessments, affect your ability to exit.

If you’re considering the advantages of a group worker’s compensation plan, make sure you understand all the pros and cons. With a clear understanding of the situation from the beginning, you’ll be much more satisfied with your experience in the long run.