group captives

Group Captives – How Important is the Broker/Agent?

Your company has grown, you have good loss control and favorable claims experience, so you are considering a group captive to significantly reduce long-term insurance expenses. You’ve done some research on group captives and feel like it might be an option to seriously consider. At this point, you have consulted with some of your industry peers, spoken with your current broker and maybe a few others about the idea. But how do you know who to place your trust in for such a significant business decision?

Joining a group captive is not like other insurance decisions you might have made in the past. Your current agent or broker may have done an outstanding job for your company as you grew to this point. But having a broker with the ability to sell you a group captive is one thing and having a broker with the expertise, experience, understanding, control and management of that group captive is quite another. 

What should you be asking when choosing a broker for your captive?
1. Does the broker have the expertise to perform a quality feasibility study? While some brokers may have marketing contracts with one or more group captives, it does not mean they have expertise in evaluating the feasibility of joining that group captive. At a minimum, a five-year historical performance analysis should be performed comparing your total insurance costs to what they would have been in the group captive. 

2. What kind of expertise does the broker have with captives? Most brokers will never place a client with a group captive in their entire career. Or they may place one or two of their larger clients into a group captive but have no real understanding of or control over that group captive going forward. 

3. What kind of understanding does the broker have about the details of how the group captive actually operates? There are a variety of key components of a group captive that must work together to make it operate efficiently. Your broker should be able to provide you with a clear understanding and explanation of how these components work together. They should know who the key service providers are for these various components. In addition, they should be able to explain how the members interact with those service providers, including the fronting company, reinsurance company, claims administrator, loss control consultants, bank, investment advisor, captive manager and captive consultant. 

4. Can the broker provide ongoing financial performance exhibits and have the ability to audit your captive financial statement so that you are assured the numbers are accurate? In a group captive, you are both retaining and sharing risk with the other members. Does your broker/agent have the expertise and resources to track and audit all of the financial statements and invoices to ensure they are correct?  You will also want expert consultation on how your company and the group captive are performing on a continuous basis.

5. Can the broker demonstrate exactly how the exit strategy works for the captive? Should you decide to sell your business or simply leave the group captive – can you get out? The exit options (and terms and conditions) can vary greatly, and you should understand your exit options before you make the decision to join a particular captive. Your broker should be able to explain this in great detail.
This is an important decision; a group captive is not something for a broker to just “place” you in. It will be a long-term financial commitment and one not easily broken in most cases. Careful consideration and time should be spent as you explore your options and find out if a group captive might be the best fit for your company. At least six to eight months is recommended for you, the broker and the captive to perform all the due diligence necessary. Actually, a great time to start the process of selecting a broker is immediately after your last renewal. You will have fresh full-policy-year information as well as the latest guaranteed cost rates to work with and plenty of time to make the best decision for your business. 

A final question you might ask yourself: Does the broker or agent have the strategic captive resources to truly partner with my company for many years to come?

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This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.

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