Can Captive Insurance Overcome the Cost of High Ex-Mods?

A high workers’ compensation experience modifier, or ex-mod, can be a significant drag on a business’s profitability. Used by insurers to calculate an employer’s premiums, lowering the ex-mod is key to turning workers’ compensation from a burden into an asset. But bringing a high ex-mod under control takes years, and meantime the business needs to stay in compliance.

Some companies struggling with high ex-mods may wonder if captive insurance programs could offer them a way to bring costs under control. The short answer is that, generally speaking, captives aren’t the answer. Here’s why.

How does captive insurance work?

In a captive insurance structure the insured business owns, in whole or in part, its insurer. The “captive” insurer may exist only to serve the needs of one owner, or it may provide services in much the same way as an independent insurance company would.

Large and well-capitalized businesses sometimes form captive insurers that are dedicated to one owner. A more common approach is the group captive, which serves many owners at once.  The group approach helps to spread risk and the cost of administering the captive.

Businesses with high ex-mods may think of the captive approach as a way to escape outlandish premiums. The idea is that the owner-insured can exercise a degree of control over the captive’s pricing, while turning premiums into an investment rather than an expense.

The problem for most businesses with high ex-mods is that captive insurers still need to account for the risk represented by the insured’s ex-mod rating. That is because the need what is called a fronting carrier.

What is a fronting carrier?

The fronting carrier provides the financial resources that allow the captive insurer to function as an insurer. As one would expect, fronting carriers place specific financial demands upon the captive insurers they support. A fronting carrier will not agree to insure a high ex-mod business without passing through the cost of carrying the associated risk. 

As a result, high deductibles and significant capital investments will be necessary to satisfy the fronting carrier’s requirements. The amount of the capital investment is determined by an actuarial study, which calculates the capital requirement based on projected claims.

Fronting carriers are few and far between, and companies in the business of providing this service limit the types of coverage they are willing to provide. Every following carrier has made regulatory filings in the state where it does business. These filings dictate the types of insurance coverage the fronting carrier offers.

Captive insurance is rarely the answer to the high ex-mod challenge.

The combination of limited or even monopolistic supply and high capital requirements typically makes captive insurance programs a poor option for businesses trying to reduce the financial burden of a high ex-mod. Instead, we recommend tackling the underlying source of the ex-mod problem: the company’s poor claims record. By implementing a comprehensive risk management strategy, a business can set the foundation for putting its high ex-mod years behind it.

Gunnin Insurance works with businesses to resolve the high ex-mod challenge. What risk management challenges is your business facing? Give us a call today to make an appointment to talk with one of our workers’ compensation and risk management specialists.

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Gunnin’s team is standing by to help businesses find new and better ways to tackle their risk management challenges. Contact us today to find out how we can make your firm’s workers’ compensation program do more.