Six Types of Captives and How They Can Reduce Workers Comp Costs

A Captive is an insurance company providing insurance to and controlled by its owner(s).

Workers’ Compensation is the line of coverage making the most sense to participate in a captive since there is long lag time when the claim is actually paid out and closed.

While the money is sitting in a captive and listed as a “reserve,” it continues to earn investment income as well as return of premium (underwriting profit) if the claim closes out for less. The battle of the reserves is over.

Various types of captives are categorized as follows:

1-Single Parent Captive: Is an insurance company formed by one company to insure/fund their own losses. Typically Fortune 500 companies will have their own captive established. No Risk Sharing occurs.

2-Rent-a-Captive: The structure of the captive is established by one entity, i.e. CitiGroup who owns the captive. They then have the actuaries, TPA, loss control, etc already established and larger companies who might pay $3,000,000 in premium or more rent a cell of the captive.

3-Agency Captive: An insurance agency creates a captive to insure their clients. Depending on how the group performs the agency receives investment income or return of underwriting profit, not the company who is insured. This is less common today.

4-Group Captive: Are for middle market companies typically paying premium from $150,000 up to $3,000,000. Each participating company purchases (workersxzcompxzkit) a share of stock and attends board meetings to make decisions as an insurance company. These members share in underwriting profit and investment income as well as risk share with each other. Tight controls on membership are often seen.

5-Homogenous: Same type of company participating. Example: Artisan Trade Contractors program.

6-Heterogeneous: Various types of employers participating ranging from an auto dealership, credit union, contractor, manufacture or food processor.

Author: DeAnna E. Slater, CIC, AFSB is an Area Vice President with Arthur J. Gallagher Risk Management Services, Inc. in West Fresno, CA. She is a specialist in the alternative market as it relates to reducing workers’ compensation costs. Contact her at deanna_slater@ajg.com or visit her at http://www.captiveexpert.blogspot.com/

Click on these links to try it for yourself.
WC Calculator www.ReduceYourWorkersComp.com/calculator.php
TD Calculator www.ReduceYourWorkersComp.com/transitional-duty-cost-calculator.php
WC 101 www.ReduceYourWorkersComp.com/workers_comp.php

Do not use this information without independent verification. All state laws are different. Consult with your corporate legal counsel before implementing any cost containment programs.