Surviving ACA: Using a Captive


This blog post is a supplement to our webinar on Self-Funding.  If you would like some information on the content of the webinar, you can contact our presenter by clicking here.

Captives are frequently used by employers to fund their catastrophic risk in the form of reinsurance above their self-funded plans.  By pooling their reinsurance exposure through the captive, employers control the underwriting and investment profit for this layer of risk in addition to their own self-funded risk.

So what is a captive?  A captive is an insurance company that provides insurance to and is controlled by its owners.  A group captive is an insurance facility formed by companies joining together to share risk.  Captive participating companies maintain good loss histories and effective risk management programs.

The stop loss or reinsurance group captive is attractive for middle market employers that want to limit their claim payment volatility and believe they can profit from assuming more risk.  There is an additional cost in joining a captive called collateral.  Collateral is the investment the participating group makes into the group captive to cover the portion of the risk above premium assumed.  Collateral will remain intact and may be refundable depending on underwriting results and losses.

In addition, a group joining a captive will have to sign a Participation Agreement.  This agreement governs the risk sharing, risk distribution, termination, representations, and warranties of the participants in the captive.

There are some additional benefits to participating in a captive versus a traditional self-funded plan:

  • An employer can increase upside underwriting return through the captive’s pooled risk.
  • Capitalization costs for a captive are significantly lower than those of a conventional insurer.  When this is combined with a reduction in premium and tax benefits, captives can smooth overall risk financing costs over time.
  • Captives make it possible for you to retain underwriting and investment income.  This allows an organization to match revenue and expense more efficiently.

AUI has experience in working with self-funded plans and captives.  If you would like more information about captives or would like AUI to determine if your company is a candidate for a captive plan, please contact us by clicking here.

We do more than cover small businesses and individuals with the right insurance policies and benefit plans – what motivates our team is helping you save more so you can invest more in your team, family, and goals.

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