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How Captive Insurance Can Work With Workers’ Compensation

For many years, employers have used captive insurance in many ways to control insurance expenses. Skyrocketing premiums in the traditional insurance markets, coupled with an inability to place unique risks with traditional commercial insurers led to the growth of group captives as a self-insurance solution. Employers across the country have leveraged the power of group captives in self-insuring workers’ compensation risks. This insurance model has the potential to hold significant benefits for companies, even as workers’ compensation premiums and claims rates are falling. 

The Changing Face of Workers’ Compensation

According to an article published in the October 2018 edition of Business Insurance, workers’ comp insurance rates have seen a sustained decline over the past five years. The article was based on a report produced by the National Council on Compensation Insurance and indicated that the lower rates were the result of a nearly 20% decrease in claim frequency. In 2017 and 2018 alone, claims frequency decreased by an average of 6%. Prior to this steady decline in claims frequency, employers were faced with potentially staggering workers’ comp expenses, including both annual premiums and payout of claims. To help manage those expenses, more and more employers turned to captives as a self-insurance solution. With falling rates in the workers’ comp sector, do captives still make sense for employers? 

Making Sense of Captives in Workers’ Compensation

At their best, captive insurance solutions improve the financial position of the companies that pool their liabilities in group captives. For workers’ compensation, this financial benefit can be substantial. Workers’ comp claims tend to have long spans of time – nearly 50 years in certain catastrophic cases, and it can be hard to predict the costs associated with those claims. By pooling liabilities, members of a group captive can better manage each member’s specific risk exposures. Surplus premiums over and above claims are returned to the members, offering both financial and tax benefits. 
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One emerging solution for captives is the concept of the large deductible policy. This differs from a guaranteed cost policy in that employers retain a portion of the workers’ comp risk while lowering the costs associated with the risks. Using captives to finance large deductibles – exceeding $100,000 – allows the workers’ comp insurance carrier to pay monthly premiums into the captive, and those premiums are deducted from operating income before claims. As with many captives, this creates a significant tax advantage. 

Leveraging captives as a workers’ compensation funding solution offers numerous other benefits, including:

  • Risk transfer – members are able to transfer their loss risks to the captive insurance company.
  • Cost savings over traditional workers’ comp insurance – captives eliminate some of the overhead expenses added to policy premiums, including the profits built into the insurance arrangement by traditional insurers.
  • Retention of excess premiums – if the combined losses are lower than expected, excess premiums collected are kept by the captive insurer for future use. 
  • Improved claims control – because the captive is owned by a parent company or group of companies, those entities can specify claims processing procedures and claims payout, eliminating some of the difficulties associated with working with a traditional insurer. 

Traditional workers’ compensation insurance carriers have begun lowering premium costs in an effort to compete against captives. Despite these attractive options, captive insurance remains a cost-effective, flexible, and tax-advantaged solution for employers. Workers’ compensation funded through a captive offers significant benefits, and more employers are taking advantage of the incredible savings possible through this alternative insurance strategy. 

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (317) 575-4440.