July 27, 2017
If you have read my previous articles you would now know why or why not a captive is for your company. Having said that, not everyone qualifies. There are certain areas that a company must be strong, in order to be placed in a captive.
One of the biggest factors in qualifying for a captive would be premium volume. In most cases the worker’s compensation is the main policy that is placed in the captive. The other two that can often be placed in a captive are the auto liability and the general liability. The combined amount of premium needs to be in excess of $100,000. Some captives will even require higher premiums.
Another key factor in qualifying for a captive is having a solid loss history. Loss history doesn’t have to be perfect or completely without fault but it needs to be good. These are large corporations we are dealing with here, they are likely to have some claims but they need to be below the industry average. A company who has had above the industry average of claims for four of the last five years will most likely not be a good fit.
Companies need to be in an industry that is not susceptible to extremely high amounts of risk. If you are a firework wholesaler or a gun manufacturer then you may find it hard to be placed in a captive. Since members of the captive get to vote on who is let in and they all share in the profitability of the captive it isn’t always in their best interest to accept high risk companies. This particular qualification is not set in stone and members can vote to approve any company they want. The higher risk companies are still less likely to get approved.
Collateral is also important. Since captives place some of the risk on the insureds they need to be able to withstand some hits. A company that is not in good financial standing could cause the other members of the captive to have to pick up some of the slack. So naturally this can be a disqualifier for some businesses. Each captive will have a collateral requirement that each member has to post to help the captive stay financially stable as well as ensuring the member is financially stable.
The reasons listed above are some of the main factors in whether or not a company would fit in a captive. There has to be a high enough premium volume, low loss ratios, be in the right industry, and have the financial backing to qualify for a captive insurer. If you are wanting to learn more about captives check out the blog at www.therackleygroup.com or check my other articles on LinkedIn.