The Smart Alternative to Traditional Insurance
Over the past decade, as businesses have faced higher traditional insurance premiums or found available insurance markets for their particular businesses, the use of alternate financial instruments has increased dramatically. OneGroup has been on the leading edge of design and utilizing alternate risk financing to transfer risk and cost for our clients. These alternate programs to commercial insurance are legal entities, such as a captive insurance company, or risk retention group, that assumes from one or more entities the liability to pay their future losses.
Why do people use captives and risk retention groups?
A captive insurance company (“captive”) is an insurance company organized to cover the insurable risks of the parent organization and/or its affiliates. Thus, it is a captive of the company or group that it insures.
According to industry data, currently over 40% of major U.S. companies own their own captive insurance companies. What these companies have learned is that there are many significant advantages including:
- Gives you control over your claims: no one knows your business and industry better than you
- Captures the investment income for you, not for a third-party insurer
- Reduces costs by eliminating the large insurance company’s profit margin and potentially high overhead
- Offers flexibility to take advantage of lower rates during soft markets to build reserves for use to cover more risk when the market hardens
- Allows you to purchase high limit ‘reinsurance’ at wholesale because you benefit from your claims experience, not that of other companies that may have high claims: with better claims experience, the excess of net premiums over claims is retained to offset any future claims
- The claims management process is more efficient due to the dedicated nature of the captive
What types of businesses benefit from a captive insurance company?
Because each member of the captive is an owner, the following criteria has been established to ensure the quality of membership and long-term strength of the captive:
- Management commitment to risk management and safety and claims mitigation
- Financial strength of member companies
- Loss experience better than industry average (spread between premiums paid and losses)
- A commitment to risk management
- Current combined premiums in excess of $250,000 (workers’ compensation, general liability, auto liability)
What is a risk retention group?
A Risk Retention Group (RRG) is one form or type of captive that is restricted to writing only liability coverage. A Risk Retention Group may have either state or federal charters. A federal charter allows the Risk Retention Group to write liability coverage directly in any state where it is registered without having to become a licensed carrier in each state or use a fronting company. This can significantly reduce the cost and effort of crossing state boundaries. However, they are restricted to writing liability coverage.
How does a risk retention group work?
Risk Retention Groups are insurance companies. They are similar to mutual companies in that they are owned by their policyholders. Risk Retention Groups were enabled by the Federal Liability Risk Retention Act of 1981 to help business and professional organizations obtain liability insurance that had become unavailable or unaffordable due to the increasing numbers of lawsuits.
OneGroup’s business risk specialists can work with you to determine if alternate risk financing is right for your company and guide you to design a program specifically to meet your business objectives.