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With the right mix of companies, a group captive, or what we now commonly refer to as Group Insurance Programs, can be a most effective way for a middle market business to manage their risk. Over the years, captive insurance companies have become an accepted method for risk financing. Today, they are routinely used by corporations that run the gamut in size from Fortune 500 to local restaurant chains. Generally speaking, however, captives have a stigma attached that they are either much too complicated or that they are only used by larger, more sophisticated, publically traded companies. That school of thought has changed rather dramatically over the past 10 years.
Current market conditions
Without question, the current soft market has been extended much longer than most industry observers had thought. Having to deal with the adverse effects of the financial crisis has been challenging for most insurers/reinsurers. They have to deal with everything from competing with insurers that are "too big to fail," to investment income that resembles Christmas club account interest. As a result, it was difficult to see how most insurers/reinsurers were going to be able to retain their current rates. But retain them they have, and for most there is little mention of increases on the horizon. For the most part, captive growth in recent years has come primarily from the middle market clients and primarily from the concept of "group captives," or as I said earlier, "group insurance programs." The primary reason for this is that these accounts "get it." Many middle markets firms are beginning to realize that the most cost effective methods of protecting their balance sheets is via the group insurance approach. It's this fact, the "getting it" thing, that has led to the continued acceptance of the group insurance program concept.
 As a result, most current group insurance members are well aware of why they came to join a group in the first place. They have come to realize that their true cost of risk revolves around their ability to control and minimize their claims frequency and severity. As a result, there is a pretty interesting mind shift going on. Despite the soft market, these firms are concentrating on developing strategies that will reduce frequency and severity, rather than simply getting competitive bids for the lowest price insurance.
The advantages of managing corporate risk using a captive/ group insurance company are well-known: control over administrative costs, reduced or refunded premiums and, in many cases, tax-efficient capital usage. As is the ease whenever a company retains its own risk, captives allow companies that invest in preventive risk management to accrue substantive benefits or equity.
Let's define the middle market first. We would consider that as those companies with total premium volumes between $100,000 and $2.5 million. While that "old school" conventional wisdom is that captives are typically outside the reach of such companies, there are a few important exceptions to this rule.
HOW IT WORKS FOR THE MIDDLE MARKET CLIENT
Many other forms of captives do exist, along with single purposes or single parent captives (think FORD MOTOR COMPANY.) Some involve companies "renting" space in a captive held by another organization. In this situation, the assets of each participant are separated from one another, yet there is some system in place whereby risks are shared.
Jurisdictions have names for these rented spaces: rent-a-captive, protected cell captive, segregated account captive, sponsored captive and so on. Rent-a-captives can be complex and often do not actually solve the "size" problem encountered by the middle market. These are MUCH different than a group insurance program! Despite the perception and the stigma, midmarket companies still lacked the range of insurance options available to larger entities-until the evolution of the group insurance concept.
A group captive is established by a group of like-minded companies rather than a single company. The companies are often times in the same or similar industries
(homogeneous,) or more commonly, with like minded insureds in a variety of business classes (heterogeneous) who need similar risk coverage. Through participation in a group insurance program, each member can achieve benefits that would not have been available had it tried to form its own captive. In order for the group as a whole to gain from the operation, its members WILL have a better risk profile than what is suggested by commercially available insurance premiums. The captive premium, at least initially, could be similar to what is available commercially. If the group is better than average, it will get the money or dividends back.
If it is well designed, the benefits of a group insurance program are identical to those gained by a single-parent captive. First, knowing that the group's members have lower-than-average historical risk profile (highest performers and most committed to control exposures) for their industry, they will have fewer or less expensive claims and they will save on premiums. Over time, members will share in the equity of that great performance in the form of dividends.
Further savings come from the fact that group captives are tax-efficient. Just as if a member had purchased a full commercial insurance policy, the premiums paid to a group captive are usually tax-deductible.
Given the potential rewards for companies that manage risk better than the average for their industry--as well as for insurance companies looking to segment risk in an increasingly competitive marketplace-middle market companies can derive a significant advantage from creative insurance solutions. Properly structured, the overall financial risk is minimal measured againest the substantial rewards that can be achieved.
What's The Gaudreau Group's solution? Stay tuned for our next broadcast to find out! | 
