Could a Work Comp Captive Benefit Your Business?

If you want more control over your workers’ compensation program, a work comp captive could be the solution. Captive options are particularly helpful when the traditional market doesn’t provide the coverage types, terms, and rates you need.

What Is Captive Insurance?

In the traditional insurance model, businesses purchase policies from insurance carriers. Carriers establish the policy terms and rates. Rates are based on the employer’s projected losses. If losses are more than expected, the insurer pays the claims, takes the financial hit, and will likely charge more upon renewal. On the other hand, if the employer’s losses are less than projected, the carrier keeps more profit.

In the captive insurance model, the business establishes a wholly-owned subsidiary for the purpose of providing insurance to the parent company. According to the National Association of Insurance Commissioners (NAIC), a captive is essentially a form of self-insurance. This arrangement can provide coverage for unique risk-management needs and offer significant tax advantages. It also means that when an employer’s losses are less than expected, it helps the employer’s bottom line. These reasons make the model appealing to many businesses. In fact, approximately 90% of all Fortune 500 companies use captive insurance.

There are multiple types of captives. The NAIC defines a pure captive as a company that insures the risks of its parent and affiliated companies or controlled unaffiliated business. Other common captive types include association captives, which insure their member organizations, and group captives, which insure group members. Captive arrangements can be suitable for businesses of different sizes and with different risk management needs.

Work Comp Captive Solutions

If your company has employees, state law most likely requires you to carry workers’ compensation insurance. In many states, there are multiple ways to meet this requirement, including work comp captives.

The captive workers’ comp model generally works as follows:

• The captive insurance company is owned by the company or companies it insures.
• The insured businesses pay premiums to the captive insurance company and the captive pays claims. This is similar to the traditional insurance model.
• If losses from claims are less than the amount paid in premiums, the captive may redistribute reserve funds to the owner or owners.
• The business can enjoy certain tax benefits. According to Investopedia, premiums paid to captive insurers can be tax deductible as long as the business model meets risk-distribution standards. This allows businesses to have a current year write-off even if losses never occur. To avoid problems, it’s important to follow IRS rules to the letter.

Deciding Whether a Work Comp Captive Is Right for You

Captive insurance solutions are fantastic options for some businesses, but they are not suitable for all businesses. To see whether a captive might be right for you, ask yourself the following questions. If you can answer “yes” to all of them, you should consider looking into captive solutions.

• Are captive work comp solutions permitted in your state? Workers’ compensation requirements vary by state. In many states, businesses are allowed to shop around for the best workers’ compensation insurance from a number of private insurance companies, including the captive insurance solutions they form for the sole purpose of providing workers’ compensation. However, IRMI says there are four monopolistic states that require businesses to purchase insurance coverage from the state fund, unless they are authorized to self-insure. The monopolistic states are North Dakota, Ohio, Washington, and Wyoming. Before you establish a captive work comp company, you’ll need to make sure it complies with your state’s rules.
• Are you committed to controlling your exposures? Managing your risks is always an important part of controlling your insurance costs, but it is critical in the captive model because you have a more direct role in your coverage. If you can reduce the severity and frequency of claims with good safety policies and claims management, you can reap the benefits.
• Are you dissatisfied with work comp options in the traditional insurance market? If you are happy with the workers’ compensation coverage you have through the traditional market, you may not want to deal with the extra steps of joining a captive. However, if you are dissatisfied with the costs or coverage, a captive may be worth the effort.

Are you interested in joining a group work comp captive? Tangram’s Bodega Insurance Program is a member-owned group captive available to enter by invitation only. Learn more.