Do You Know Enough About Work Comp Captives to Make a Decision?
Work Comp Group Captives are not new, but as an attractive cost-reducing option, their popularity is growing. With renewed interest in Group Captives, employers should be cautioned with an important question: do you know enough about Captives to make an informed decision?
I am not “anti-Group Captive” but I agree with the conclusion of a recent article by the co-founder of Oceanus Partners – the typical answer is an unqualified “no.” In other words, employers tend to know a little about Group Captives, but that knowledge is usually tilted toward seeing Group Captives as a one-stop solution to cost containment, not part of a comprehensive approach to reduce Work Comp costs.
Go ahead and Google “Workers’ Compensation Group Captives” and watch your search results bloom into thousands of results. You’ll find lots of information about the benefits of Captives, and very few disclosures of the risks. That may be the nature of the web, but it’s also indicative of the imbalanced level of information employers receive about Group Captives.
The reasons employers are considering Group Captives are compelling:
- Group Captives contain better risk pools of employers and lower losses than traditional insurance
- Some Captive managers promise lower Work Comp costs
- Improve your risk management and you’ll reduce losses
These are all valid and many employers have enjoyed these results. But most employers don’t hear the disclosures that should make them think twice. What happens if there are inadequate loss reserves when actual losses exceed expected levels? How much will members of the Captive have to pay if additional funds are needed to pay claims and expenses?
It may be that the alarms raised by these disclosures are unlikely to happen to most Group Captives, but there are unforeseen risks that could change the financial condition of the Captive overnight.
Predicting future tends for the reinsurance market isn’t easy, but if the currently “soft” market were to “harden,” Group Captive expenses would certainly go up. What if a member of the Group Captive suddenly left? What does a business do when non-Captive premiums go up?
The result of each of these risks is that the implied cost savings of a Group Captive can evaporate. Or worse, the account may be non-renewed and finding replacement coverage could be difficult or impossible. Another consequence of joining a Group Captive is that participation could complicate future merger or acquisition activities.
As I mentioned at the beginning of this blog, employers need more information to provide balance and make the benefits and risks clearer. Ultimately, the decision to choose a Work Comp Group Captive should be part of a comprehensive approach to Work Comp cost reduction.
Is a Group Captive right for you? I can help you navigate through the available choices, and I can assist you in developing sensible solutions that can control and reduce your Work Comp costs.
Please email or call me anytime to get the conversation started.