Companies Turn to Captive Insurance Solutions for Workers Compensation

Companies Turn to Captive Insurance Solutions for Workers Compensation

Companies Turn to Captive Insurance Solutions for Workers Compensation

Today’s challenging worker’s compensation insurance market, with frequent claims, increased abuse and fraud, and rising rates has many companies looking for alternatives, including considering large-deductible plans and captive insurance solutions.

Large-deductible plans allow company to choose to pay all claims up to an agreed amount. At the per-claim cap, the insurer takes over. Large-deductible plans usually have an aggregate stop point to save a firm from catastrophic losses. But for many firms, the use of a captive insurance company to pay the claims offers key advantages, along with tax breaks.

A captive is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and in which the original insureds are the principal beneficiaries. In a captive, the shareholders/insureds actively participate in decisions influencing underwriting, operations and investments. Benefits of a captive, in addition to its tax advantages, include the ability to negotiate premiums with underwriters, implement closely targeted loss control, have greater control of claims settlements to lower costs, and provide incentives for return-to-work programs to get employees back on the job, among others.

Generally, there are two types of captives used for workers compensation:

Single Owner or Pure Captive whereby the company retains complete control over the operation, investment activity, and claims payments of the owned captive. The pure captive will cost more to set up and, depending on the level of involvement the firm elects, involves more hands-on time on behalf of the administrators. A company can operate its own insurance division to maintain complete control over the captive, but a Third-Party Administrator (TPA) must be employed for claims management.

Rent-A-Captive, which is a far more popular for the workers comp arena, is owned by an organization that is not one of the insureds. These captives can be run by a broker, a reinsurer, or, more commonly, by a fronting insurance carrier. The fees for this type of captive are usually much lower than the initial capital required to start a single owner captive.

For a company to seriously consider forming a captive, it must be financially sound and ready for the commitment involved. Those that have success with captives are forward thinking with a serious focus on loss control, safety, and risk management. They are open to sharing the risks involved in compensation and have the organizational ability to deal with uncertainty. It’s critical for top managers to be committed to a long-term solution that will build a financial base to allow for a greater level of risk acceptance in the future. The company’s losses must be fairly predictable, and the total expected losses cannot be more than the anticipated premium.

What’s more, there are tax advantages. Owning a captive insurance company can actually reduce one’s income tax liability. If structured properly, the premiums paid by the business to the captive insurance company are a deductible business expense. Additionally, the premium income could be tax-exempt income to the captive insurance company. The Internal Revenue Code provides certain tax advantages to small insurance companies depending on the amount of premium income received.

In today’s difficult Workers Compensation in many states across the country, Caitlin-Morgan can help you determine whether a captive is right for your insured. We can also help you customize a captive solution that will meet their needs. Give us a call at 877.226.1027.