WC Deductibles and Captives: A Match Made in Heaven
Savvy companies with a sophisticated level of comfort with retaining risk are more and more frequently migrating from guaranteed cost insurance to loss sensitive programs. The decision makes a lot of sense; why allow an insurance carrier to capitalize on your positive experience when you could reap the financial benefits? Beyond potentially reducing your insurance spend – which is often reason enough – there are several benefits to crossing over to a loss sensitive plan:
- Cash flow: depending on the program structure, you may only be funding losses on a paid basis rather than funding claim reserves
- Control: you have more input in claim handling and risk management decisions
- Stability: you’re further insulated from the wild swings of the guaranteed cost marketplace
From my perspective, the choice for a sophisticated, safe buyer to move into a loss sensitive program is a no-brainer. But why stop there? My experience focusing on alternative risk allows me to see the big picture, and there’s more to be done! If you’ve already made the leap into loss sensitive, it may be time to consider linking that with your own captive structure.
A captive echoes several of the benefits I listed above, plus more:
- Return of underwriting profits and investment income to the captive owners
- Ultimate control over claim handling and risk management; in a captive you choose your own claim administrator, risk management firm, legal representation, actuary and other service providers
- Coverage for lines of business that are expensive or unavailable in the standard market
- Ability to use the captive owner’s historical experience to calculate funding, rather than industry data
Now back to workers’ compensation: one of the most common captive structures we see is the creation of a single parent captive to fund the reserves of a large deductible or self-insured workers’ compensation arrangement. The captive owner receives an accelerated tax deduction of reserves or paid claims, while the relationship with the commercial insurer is left in place. Over time, the business can take on more risk through higher retentions and create a funding vehicle for those retentions.
One of the best features of a captive is its ability to evolve over time to accommodate a company’s risk financing goals. It goes way beyond funding retentions – often a captive owner, once comfortable with the above structure, starts finding new, creative ways to use their captive. Perhaps it’s to cover a self-funded benefit plan for their employees, or maybe there’s an insurance coverage they need to purchase that’s overpriced in the standard market (construction defects, trade credit) or widely unavailable (loss of key supplier, weather risks). Forming a captive opens up a world of possibilities.
Contact one of our trusted insurance advisors to learn more about how you can minimize risk.
- Exploring the World of Insurance Captives
- 5 Key Elements to Group Captives
- Four Essential Questions When Considering Loss Sensitive Programs
- Alternative Risk Flyer