When is a captive right for you?
Captive insurance companies aren't for everyone, says Timothy E.J. Folk, vice president with The Graham Co., a healthcare consulting company in Philadelphia.
Risk tolerance is necessary, and you have to be willing to enter into a new line of business, he says. Some people are more content to simply write a premium check and know that another company is handling the claims.
"But if captive is a right fit, it can be a very strong business model that is supportive of the rest of your business strategy," Folk says.
If a captive looks like a good option, one of the first decisions is what kind of captive is right for you. These are the different varieties of captives:
Single-owner captives: A provider establishes a single owner captive to insure its own risks and the risks of its subsidiaries and affiliates.
Some single-owner captives also provide coverage for other, non-affiliated organizations, but this is the simplest form of a captive.
Group captives: These captives are owned by multiple, non-related organizations that serve as the policyholders.
The group captive is usually sponsored by a trade group, group medical practices or hospitals, or other professional groups. Group captives can be homogenous, meaning all the members are similar organizations in the same industry, or heterogeneous, meaning the members vary in type. Group captives help spread the risk from any single claim.
Agency captives: These captives are owned by insurance brokers or agents and insure some portion of the insurance sold by its agency or broker shareholders
Group captives help spread the risk from any single claim, similar to the way a standard insurer spreads the risk by having all insureds pay premiums that will be used to pay the claim of one client. But the group captive is not the same as a standard insurer because you, the policyholder, have a say in who can join the captive, explains Christopher M. Keith, a producer with The Graham Co. in Philadelphia.
"This is very much a club-like mentality. The barriers to entry are tougher than a traditional insurance market," Keith says. "It's all about their five-year historical loss rate, and you're not going to let a poorly performing organization into the group."
The flip side of those high standards is that an organization performing above the average can get the better deal it deserves, Keith says. A hospital or health group that has focused on patient safety and can show low loss rates still might be subject to class underwriting, which yields a rate increase that is higher than if the insurer judged the organization on its own.
"A captive decreases the pool that your underwriter is looking at," he says. "You get more favorable rates and more control of the underwriting process."
Captive insurance companies aren't for everyone, says Timothy E.J. Folk, vice president with The Graham Co., a healthcare consulting company in Philadelphia.You have reached your article limit for the month. Subscribe now to access this article plus other member-only content.
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