Group Captives May Be Contractors’ Solution to Rising Insurance Premiums
Author, Sam Clayton, Vice President, Construction Group, Rancho Mesa Insurance Services, Inc.
Over the last few years, contractors have started to see rate increases on multiple lines of coverage within their insurance program. And, the difficulty insurance companies are having in the property market, especially here in California with the wildfire risk, has been pretty well publicized. We have seen both homeowners and commercial landlords forced away from the standard property market and into surplus lines, or, worst case scenario, the California Fair Plan. We are also seeing commercial auto policies come under pressure due to increases in litigation, costs to repair vehicles and social inflation.
Believe it or not, workers’ compensation has been the lone outlier from these increases, until now. In the last 6 months, we have started to see a shift in the market. Carriers’ combined ratios have been steadily creeping up and underwriters are cutting back on the amount of schedule credits they can apply.
As a result of the premium increases felt across the board, one alternative risk financing strategy contractors may want to consider is a member-owned group captive.
A member-owned group captive is an insurance company owned and operated by the captive members, strictly for the benefit of those members. This structure enables middle market companies the ability to increase their underwriting credibility through the collective purchasing power of the group. These groups can be related (what we call homogeneous like a trade group or association), or unrelated (which would be a heterogeneous group which could be companies similar in size).
There are real advantages of a group captive, like:
Lower insurance costs over time
Financial incentives for strong loss control
Increased control over claims management
Investment income
Who should consider a group captive?
Companies that have shown long term financial strength
Owners who are committed to safety and have strong safety programs in place
Loss histories or experience modification rates that are significantly better than average in their respective trade
Annual premiums of $150K or more for workers’ compensation and commercial auto
As we see the workers’ compensation market continue to harden, best-in-class contractors who are looking to control their costs and protect their bottom line may want to consider this alternative risk financing strategy.
If you would like to learn more about captives, contact me at sclatyon@ranchomesa.com or (619) 937-0167.