Pros and Cons: Group Captives v. Traditional Loss Sensitive Insurance
As businesses scale and explore alternatives to fully insuring their risks and assets, many face a fundamental question: Should they opt for group captives or loss sensitive insurance? While each option has its own set of pros and cons, companies must weigh the costs, risks, and benefits carefully to determine which choice is right for them. In this article, we will explore the key features of group captives and traditional loss sensitive insurance and help you decide which option makes the most sense for your business.
Group Captives vs. Loss Sensitive Insurance
Property and casualty group captives are a form of self-insurance where a group of companies form a captive insurance company to cover their risks. The captive is owned and controlled by its members, who share the risks and rewards of the insurance program. The captive can provide coverage for various types of risks, such as auto liability and physical damage, general liability, and workers’ compensation.
Traditional loss sensitive insurance is a type of insurance program where the insured shares in the financial consequences of their losses. In this type of insurance, the premium is determined based on the actual losses incurred by the insured, rather than a fixed premium. This means that the premium may increase or decrease based on the actual claims experience of the insured.
Pros and Cons of Group Captives
Comparing group captives to traditional loss sensitive insurance, group captives can offer several advantages. First, the members have more control over the insurance program, allowing them to tailor the coverage to their specific needs. Additionally, the members share in the underwriting profits of the captive, which can result in lower overall costs. Group captives can also provide more stable pricing, as the premium is determined based on the captive’s overall performance, rather than the individual experience of each member.
Group captives also have some drawbacks. Members must be prepared to make an upfront investment to fund the captive, and there may be ongoing expenses and regulatory tasks related to the operation of the captive. Additionally, the members are jointly and severally liable for the captive’s obligations, meaning that if one member defaults on their obligations, the other members may be required to cover the shortfall.
Pros and Cons of Loss Sensitive Insurance
Traditional loss sensitive insurance, on the other hand, can offer more flexibility and lower upfront costs. The insured can adjust their coverage and risk retention levels based on their actual losses, allowing more versatility to manage their overall risk.
However, traditional loss sensitive insurance can be more volatile, as the premium can fluctuate based on the insured’s claims experience. Additionally, the insured does not share in the underwriting profits of the insurer.
Both group captives and traditional loss sensitive insurance have their advantages and drawbacks. Companies should carefully consider their risk management needs and financial situation when choosing between the two options.
Your insurance broker can help you determine which option makes the most sense for your organization. Reach out to your M3 account executive to discuss your options.