By Greg Hess, AssuredPartners

Many unique risks exist in the construction industry. There are the obvious risks such as operating large equipment, moving heavy loads, transporting shifting materials, performing work at various heights, working with hand tools, etc. Add in the exposures that exist when working with owners, GC’s, suppliers, municipalities and other subcontractors and you begin to see the complexities of managing risk in the construction industry. Contractors turn to the insurance market to alleviate much of this risk and transfer these potentially costly exposures to the insurance market. Each year, most mid-sized construction companies purchase traditional insurance policies with guaranteed costs and low deductibles. These well-known insurance policies provide the desired transfer of risk. However, they have recently become more costly and the commercial insurers get to keep all the underwriting profits.  Some savvy owners and risk managers of construction firms have turned to group captives as a better risk transfer solution.     

Group captives have been around for decades and were initially utilized by large multinational corporations. However, through the years, the captive market has become accessible to much smaller companies. In recent years, interest in captives has exploded and the construction industry, in particular, has seen a growing number of firms move into this space. Much of this growth is due to the hardening insurance market and wild premium fluctuations. By year-end, the average commercial insurance premium is expected to rise by 13.6% , according to a survey of top insurers in a recent report by the Alera Group. This follows double digit average rate increases in 2020.  Many companies are turning to captives as an alternative to the uncertainty playing out in the traditional insurance market. The construction industry has taken notice and many firms are evaluating the benefits of a captive to solve their insurance needs.

What is a group captive?  A group captive is simply an insurance company formed to insure only the risks of its member companies. Members wholly own and control the insurance company and share all underwriting profits. These captives often are usually homogeneous in nature consisting of similar companies in the same industry. For example, there are captives formed for only roofers or excavators, while other captives may consist of various trades such as carpenters, plumbers, electricians or painters. 

The reasons contractors are turning to captives are many. Here are a few of the key benefits of joining a captive and some issues to consider:

Benefits

•   Lower Insurance Costs: After fixed costs, all insurance dollars not paid out for claims are returned directly back to the member, not the insurance company.  For safety conscience firms with a favorable claims history, this is a very significant savings. 
  
•   Lower Fixed Costs: Captives operate at lower costs by spending less on marketing, acquisition and administration costs.  This lower cost creates a bigger profit potential for the members. 
  
•   Control:  Members can have as much control over claim handling decisions as they wish.  Members can consult with claims administrators and direct whether to “settle or fight” a particular claim. Additionally, critical decisions about the captive itself are made by its members by forming a board of directors and holding annual meetings. 
  
• Improved Loss Control and Claims Services: These services are specifically geared toward the construction industry and its unique risks and characteristics. Off-site safety seminars, webinars, accountability, and free consultant hours are often part of any established captive.
  
• Underwriting Stability: Premiums are based on a member’s individual loss experience making it much less vulnerable to the cyclical nature of hard and soft markets. Contractors can stabilize budgets by having more consistent expenses around insurance. 
  
• Enhanced Profit Potential: In addition to retaining underwriting profits, investment income is earned on premiums and retained earnings within a favorable tax structure. 

Considerations 

•    Risk Retention: Members need to be prepared to retain some level of risk as the premiums are not guaranteed.  A bad loss year with a high frequency of claims could result in paying additional premium.

•    Financial Stability: A strong balance sheet is required to meet capital and collateral levels. 

•    Risk Management: A solid safety program should be in place with commitment from upper management for continued improvement.

•    Claims Experience: Captives are picky and look only to add members who they hope to positively impact the bottom-line.  To get accepted into a captive, a firm needs above average claims experience.  A five-year average of loss ratios under 40% is a good benchmark. 

Despite the multiple advantages of using a captive, construction firms need to carefully evaluate their specific risk transferring needs along with their appetite to take on risk.  A cost analysis needs to be done to determine how a potential captive membership compares to what is available in today’s traditional insurance market.   For the contractor who prioritizes safety, is financially stable and is entrepreneurial and forward thinking, a group captive is often the best long-term insurance decision.  

About the Author

Greg Hess, Vice President and Regional Captive Practice leader with AssuredPartners.  Greg has over 25 years of insurance brokerage experience. He enjoys working with companies to develop and evaluate alternate risk solutions. AssuredPartners is the 10th largest Insurance Broker and Consultant in the country providing Commercial Insurance, Risk Management, Employee Benefits through consulting and services. For more information on AssuredPartners, please contact Greg by email at Greg.Hess@assuredpartners.com or asa@assuredpartners.com