Creating Profitability through Group Captive Insurance

Editor's Note: AXA XL contributes this Thought Leadership article examining the benefits organizations can realize by participating in group captive insurance programs. AXA XL is a division of AXA Group providing products and services through three business groups: AXA XL Insurance, AXA XL Reinsurance and AXA XL Risk Consulting. AXA, the AXA and XL logos are trademarks of AXA SA or its affiliates. ©2023

It should come as little surprise that the group captive insurance market is burgeoning amid a volatile economy. This is also a result of continued inflation and the hardening insurance market. In an uncertain financial landscape, insurers and financial services companies are pulling back, trying to build in safeguards for any potential recession.

That has sent organizations with good loss experience searching for alternative markets. They are looking to find ways where they have greater control of their insurance program—and have their high performance beneficially impact their pricing.

Fortunately, organizations are finding this option in a group captive. In fact, a group captive that typically includes workers compensation, general liability, and auto liability/physical damage is not only a viable way to gain control but is also a way to achieve significant premium savings when compared to the guaranteed cost market. That's right—a risk mitigation strategy that pays dividends.

For focused, disciplined organizations willing to take on a more proactive risk management approach, a group captive can be a sound way to redirect insurance dollars for maximum impact. However, not every organization is the right fit for a group captive program.

A vetting process should be developed for any potential group captive member. The organization's risk portfolio, loss history, risk management practices, and management team are looked at. There are criteria set for all the member companies that must be met in order to join a group captive program. That is meant to help all member companies perform well and ensure that all new members follow the underwriting principle set.

Once an organization becomes part of the captive insurance company, risk exposures should be actively managed to ensure the captive is in line with the captive principles. Potential member screening and vigorous risk selection should be done to ensure new member growth will not impact the profitability of the captive insurer. Likewise, underwriting, risk control, and financial meetings should be held twice annually with group members. This is done to assess the captive's performance, improve their loss control methods, make changes to the captive insurer's underwriting parameters, as well as provide financial insight.

Within the group captive a strong culture of risk management is essential. Many of the member companies, given their size, may not have a robust risk management team in place. The group captive infuses these member companies with risk management strategies and practices that improve their businesses. When managed properly, a group captive can and does often outperform the traditional markets.

When member companies improve their risk management, losses decrease. A decrease in losses impacts insurance premiums paid annually and lowers the overall cost of insurance. It also has an impact on the premiums previously paid. As the company improves or experiences fewer losses than projected, the funds held accumulate interest. In turn, both unused loss funding as well as interest accrued become potential dividends that are distributed to the members.

More companies are actively seeking membership in a group captive to transfer risk while keeping insurance costs in check. There has been significant growth in the group captive segment of the market within the last 5 years. As well-managed group captives continue to grow in both size and popularity, we expect this market segment to remain a strong growth area in the casualty product lines.

While the lines of coverage may be the same, workers compensation, auto liability, and general liability, the member companies are from disparate industries. For a captive insurer to perform well, the management is key to its success. Captive management includes educating potential members on how a group captive can best function, examining pros and cons of the traditional market, ensuring meetings take place, discussing risk management, and reviewing of the financial health of all member companies.

As the economy continues to put pressure on the insurance and financial markets, top performing organizations will be seeking new ways to transfer risk while preserving their budgets. A group captive could offer a sound alternative to traditional markets.

When you join an actively managed, select group captive, your organization can benefit from both the additional risk management support and the potential profit that can be gained when all members in the captive work together. More importantly, your organization adopts a more robust culture of loss control and sound risk management practices. This builds a stronger organization and enhanced safety practices for all employees.