HOW DO YOU CHOOSE ?
FIGURE 1
6 ) INVESTMENT INCOME RETAINED BY MEMBERS Investment income is generated on loss reserves and the unused portion of the loss fund , which is ultimately return to members in the form of dividends .
Group captive members also find it desirable that the annual insurance bidding process is all but eliminated on their primary casualty lines ( workers ’ compensation , general liability , and automobile ) and renewal figures are typically available around thirty days prior to program expiration .
WHAT ARE THE POTENTIAL PITFALLS AND OTHER CONSIDERATIONS ? 1 ) RISK SHARING A portion of your loss fund ( specifically , the “ B Fund ” or Severity Fund ) is in play every year to fund losses for other member companies . Unlike a large deductible program where your company ’ s loss experience within the deductible layer drives the total cost of risk , group captives introduce risk sharing amongst members in order to fund losses that exceed loss fund contributions . In other words , a portion of your loss fund may be used to pay the losses of other members , so it ’ s possible to have no losses in a given year and still not receive 100 percent of your loss fund as a future dividend .
2 ) ASSESSMENT POTENTIAL Another important consideration is that group captive participation does not come without assessment risk , and members are responsible for one additional “ A Fund ” ( or Frequency Fund ) in the event losses within the frequency layer exceed the frequency fund .
3 ) COLLATERAL REQUIRED Further to the previous point , collateral in the amount of two times the “ A Fund ” is typically required and collected over a three-year period of time ( one-third per year for three years ). The collateral is required in order to secure the potential “ A fund ” assessment previously discussed .
4 ) DIVIDEND SCHEDULE Dividend payouts do not typically begin until three years after expiration of the first policy year , or four years after officially joining the group captive . They also may not close out the dividend payments until year seven or eight . In other words , don ’ t make the decision to join a group captive with the idea that you ’ re going to see an immediate return .
5 ) UP-FRONT CAPITAL CONTRIBUTION There will be a requirement to purchase stock or some other form of capital contribution to gain membership . This money is returned to the member company with interest if and when they exit , but it still represents a year one cost to gain access to the group captive market .
HOW IS THE LOSS FUND AND DIVIDEND POTENTIAL CALCULATED ? An actuarial calculation involving five years exposure and loss information is used to develop the premium and loss fund . The loss fund is then broken down further into an “ A Fund ” and “ B Fund ”, each with a specific purpose . The “ A Fund ” is established for the purpose of paying frequency claims , typically up to a maximum per occurrence or claim of $ 100,000 –$ 125,000 . The “ B Fund ” serves the purpose of paying severity claims above the frequency layer of $ 100,000 –$ 125,000 and up to the captive retention ( more on the captive retention shortly ). In the event the severity fund is fully depleted by a member , other members must contribute from their severity fund as a form of risk sharing in order to cover any gap , up to the captive retention . Finally , the
captive retention , which typically ranges from $ 350,000 –$ 500,000 , is the maximum per occurrence loss that the captive will incur before reinsurance covers the excess loss up to the underlying limit of liability .
HOW DO I EXIT A GROUP CAPTIVE ? Many group captives have no penalties that preclude you from exiting on the anniversary date of the program . However , that question should be posed while evaluating program options . Also , any stock purchase or initial capital contribution required by members at entry should be evaluated and an understanding developed as to when that money will be returned after exiting the program .
WHAT CAN I INSURE THROUGH A GROUP CAPTIVE ? The traditional lines of business insured through group captives are workers ’ compensation , general liability , and automobile . The majority of group captives will entertain some or all of the lines referenced , but oftentimes workers ’ compensation is mandatory .
WHAT SIZE ANNUAL PREMIUM DO I NEED IN ORDER TO QUALIFY ? The low end of the range is generally $ 100,000 of annual premiums in the eligible lines of business . However , $ 250,000 is generally a more realistic entry point .
As with any insurance product , there are any number of factors , beyond those captured in this article , that need to be considered when evaluating options . If the concept of retaining risk is of interest to you , whether through a captive or deductible , talk to your BMB representative and ask them to provide recommendations on the products that may be most appropriate for your company . +
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