Captive insurance is a form of financing risk utilizing a growing range of options designed to protect against catastrophic losses, including options such as heterogeneous captive insurance programs. Frequent questions about “What a captive is?” and “What does captive mean?” are typical. Current hard market conditions are driving new and renewed interest and demand for involvement in captive insurance alternatives.
A previous post about captive insurance on the Program Business blog provides this description:
What is Captive Insurance?
One definition of captive insurance programs is an alternate form of risk management that offers insurance coverage unavailable to companies through commercial insurance programs. Another primary use is to provide supplemental insurance that extends the coverage of a company's current commercial insurance program. The inception and growth of the captive insurance industry came about to fill a need. The need was due to the commercial insurance industry's inability to create risk management products and services.
With captive insurance, insureds own and operate the insurance company that provides policies and protection otherwise unavailable or unaffordable. Captive means insureds control the company that owns it.
In general, captive insurance companies are smaller than standard commercial insurance carriers. Significantly, captives don't provide coverage against losses caused by state guaranty funds, and they may allow investments in riskier private equity firms and hedge funds.
Captive insurance companies have diverse structures, including Homogeneous and Heterogeneous Captive Insurance Programs.
Heterogeneous vs. Homogeneous Captive Insurance
A heterogeneous captive is a group of member companies from different industries. The goal is to create a more diversified spread of risk by joining member companies from a mixture of industry classifications. A heterogeneous captive may include retail, wholesale, construction, specialty trade contractors, manufacturing, distribution operations, and more.
Homogeneous groups recruit captive member companies from equivalent industry status businesses such as trucking and transportation, oil and gas, hardware manufacturers, roofing, farming, and agri-business operators, and so forth. The benefit to members is sharing comparable risk management techniques, insurance needs, and unique industry concerns. By sharing the results of essential data from loss prevention programs and other activities, they can create custom programs to match the specific industry needs of captive members. In this guide, we keep our focus on Heterogeneous Captive Insurance Programs.
What is a Heterogeneous Captive Insurance & Who Needs It?
As described above, heterogeneous captive insurance companies enroll members from different dissimilar business sectors. Through group member diversity, each participant can improve their safety culture by understanding and implementing effective measures introduced by sharing risk management practices and resources.
The best business candidates for heterogeneous captive insurance programs are profitable with reliable revenue generation and operational cash flow. Typically, they also have low to moderate risk profiles and a below-average claim frequency. Applicants often experience high insurance premiums, large deductibles and are already self-insuring parts of their operations.
By banding together comparably sized businesses from various industry sectors, heterogeneous captives create unique opportunities for members to share resources and risks by forming a joint heterogeneous captive insurance venture. Insurance operations developed like this are also known as association captives.
Standards & Rules of Heterogeneous Captives
The prohibitive costs and regulations surrounding employee benefits are why employers seek the benefits of creating communal health plans known as multiple employer welfare arrangements (MEWAs). A unified administration controls and manages MEWA funds independent of participating employers' control.
The Employee Retirement Income Security Act (ERISA) establishes additional criteria under ERISA section 3(5). Its requirements determine when employers may join a group or association of employers. The employers are the employer sponsors of a single multiple-employer "employee welfare benefit plan" and "group health plans." The result is the formation of group captives, also known as association captives, jointly owned by group members from diverse companies set to provide insurance coverage for the member-owners.
The regulation allows group captives to subdivide into heterogeneous and homogeneous groups. In this case, the heterogeneous groups include members from different industries while homogeneous groups members are from similar sectors. The mission of both alternatives is to give mid-sized employers the ability to benefit from a risk profile that is usually only available to larger, single-entity employers.
Advantages of Heterogeneous Captives
A significant factor for choosing heterogeneous captive insurance coverage is diversifying risk exposures. That's because it's unlikely for all sectors to experience downturns in business simultaneously or equally. Diversification makes the underlying financial investment in the captive stronger and less vulnerable to industry-specific downturns.
Corporations utilize captive insurance options to combat high premiums and deductibles. They also seek to boost insufficient capacity, gain access to coverage not available through traditional markets, take greater control over risk management operations, and deploy more manageable and permanent risk financing solutions.
Heterogeneous Captive Insurance Costs (and what factors affect the price)
Participants in heterogeneous captives share risks at a predetermined layer. Typically, an annual premium of $500,000 from members is the minimum to achieve the desired cost-benefit. Due to the broad scope of coverages available through heterogeneous captive liability insurance programs, coupled with an equally wide array of industry types and sizes, it's impossible to provide accurate costs for such programs.
Best Heterogeneous Captive Insurance Programs
It is a challenging task to search for and find the best heterogeneous captive insurance programs. The complexity and unique nature of captive insurance programs make using search engines mildly helpful because they often return too many irrelevant results.
The best place to start your search for help in obtaining heterogeneous captive insurance programs is the Program Business Market Directory. That's where you will find listings for well-established, cutting-edge brokers such as Tangram Insurance Services.
As a Managing General Underwriter in the specialty program space since 1999, Tangram Insurance Services operates as a distinctly unique insurance intermediary for its brokers and the industry. Using its extensive industry experience and contacts, it seeks to produce rewarding outcomes for its brokers, clients, and carriers.