For temporary staffing businesses, finding a cost-effective and responsive workers’ compensation insurance carrier can be a real challenge. Meeting the challenge sometimes requires creative solutions. For some firms, captive insurance can offer several significant advantages.
What is captive insurance?
In the simplest terms, captive insurance simply means that the insured business owns the insurer. A captive arrangement may involve the formation of a special purpose subsidiary that is organized from the start as an insurance company to serve its parent. A more practical solution for many staffing firms is to join a so-called group captive, which is organized by and serves the needs of multiple firms at once.
A captive insurer exists solely to provide insurance coverage to its parent organizations. The member firms enter into a formal insurance arrangement with the captive, with the members paying premiums to the captive and the captive providing coverage to meet statutory requirements and other risk management goals. A captive program can provide workers’ compensation insurance as well as other kinds of coverage.
Organizing a dedicated captive insurance company involves numerous decisions and steps. A captive must be organized and managed as a separate legal entity. Captives also typically need to enter into insurance arrangements of their own. Rather than staffing up a true insurance business, a captive can contract with a conventional insurance company, referred to as the risk-sharing partner, to provide underwriting and other traditional insurance services to the parent organization.
What are the advantages of a captive insurance program for a staffing firm?
There are several important advantages to operating a captive insurance program or joining into a group captive arrangement. Here are a few examples
- Control. Although the captive needs to operate as a distinct legal entity from its parent, the parent (or collection of member firms) still retains significant control over how the captive prices its plans and operates its business. As a result, staffing firms can gain a finer degree of control over the kind of coverage they receive and the premiums they pay, when compared to working with large, independent insurance companies
- Finance. A major attraction of captive insurance programs is the potential financial benefits of keeping premiums “in house.” Especially if the parent business maintains a low claims rate, the captive can accumulate significant value over time. Invested appropriately, premiums can be converted into profits for the captive. In a group captive arrangement, individual firms may get money back from the group captive based on the claims performance of the group of the course of a year.
- Beating the market. For staffing firms, captive insurance offers an alternative to the traditional insurance market, which frequently doesn’t understand the staffing industry and often doesn’t offer workable solutions. A captive often can provide what the market will not.
When is a captive the right answer?
Whether a captive insurance program is the right answer for a given business will depend on the business’s unique circumstances and capabilities. At the outset, a firm needs to have sufficient capital to invest in organizing and financing an insurer, or in meeting the requirements to join a group captive. The initial and ongoing costs of running a captive typically makes the dedicated captive suitable for medium to large firms with already significant annual premiums. Operating a captive insurer also requires executive and administrative resources.
Another important consideration is the business’s ability to manage risks. Essentially, the parent’s goal needs to be to take out less than it puts in. Doing so requires an effective risk management program. Before joining a group captive, a firm needs to conduct a due diligence review of the captive and its existing members to confirm that the group is the right fit.
Captive insurers are just one of several approaches that a staffing firm might take to address its insurance challenges. Gunnin Insurance helps temporary staffing firms evaluate whether captive insurance programs are the right solution for them. Our team has specialized in serving the staffing industry for decades. Reach out to us today to find out how we can make your firm’s risk management program do more.