Is captive insurance right for you?

NATIONAL REPORT—For hospitality companies of a certain size, workers’ compensation and guest liability issues are the largest non-capital expenditure after payroll and taxes. But what’s the best way to deal with that?

For years, some of the largest companies have turned to captive insurance to handle those costs in a way that can be a benefit. Captives offer an alternative to conventional insurance for companies with excellent claims histories to retain the benefits of their good risk management practices, rather than pay out the benefits to independent insurance companies. Depending on annual claims, up to 60% of annual premiums could be recouped by the hospitality operator, according to insurance broker Hub International.

“Captive insurance solutions have been around for a long time,” said Evan Muffly, EVP of Hub Captives at the company. “They are basically a formalized method of self-insurance, or another way for an insured company to pay for their premium and potentially get underwriting profit back. The named insured is essentially starting their own insurance company in a way, and using that to potentially get back premium that was not used to pay for claims. Businesses have been using captives going back to the 1950s.”

Hub recently launched its own hospitality captive, an exclusive member-owned group captive insurance solution. The captive was designed for hospitality clients and prospects to gain better insight into exposures and risks, and to turn that knowledge into cost savings and rewards with the potential to earn back some of their insurance premium.

“Hub’s hospitality captive allows qualified members the ability to turn insurance costs into a future income stream, especially the best-in-class hospitality operators who historically manage their risks well,” said Kevin Eggleston, practice leader of Hub Hospitality Specialty Practice. “The captive is for our clients with a solid safety culture who desire greater control in how their claims are handled and want to turn their insurance premium into an investment opportunity.”

The captive includes customizable insurance solutions and risk services for workers’ compensation; general liability; liquor liability; auto liability and auto physical damage; claims management; and advocacy services. Hub’s hospitality captive participants are also covered for catastrophic.

A group captive has benefits for all members. “[It] is a group captive for businesses to pool their risk together, and we want to find the right companies to come in and control their claims so that ultimately they can recoup previously unrecoverable premium back to them; they were paying it to a third-party insurance company before,” said Muffly. “Now, with a captive, they have the ability to recapture some of that underwriting profit that would have gone to a third-party carrier before.”

He continued, “The group does pool their premiums together within the captive to generate a larger rate of investment income, but each member has their own accounting allocation where we keep track of the portion of the premium that went into the captive, the losses they have paid and the underwriting profit that would be due back to the member down the road. The assets are really pooled for investment purposes. Ultimately, each member has their own separate accounting and allocation of what exactly is theirs.”

A captive is not right for every company in the industry. “[It] isn’t something that is appropriate for 100% of our clients, but those that are spending more than $1 million annually in workers’ compensation and general liability, if their losses are good, typically, there is a lot of money left on the table,” said Eggleston. “…Essentially, the captive is a loss fund. It is a bank account from which they can pay claims and adjust things. An insurance company is the exact same thing—you are buying claim services, you are buying loss control services, you are buying re-insurance. We just unbundled that for the industry and essentially assembled an affinity group for like-minded, safety-conscious hotel owners—and these could be franchisees or third-party management companies… If they can control losses and bring even a small portion of that back by running a safety culture, that is found money. In a business that runs as tight a margin as the hospitality industry does, this is a big deal.”

Beyond the financial benefit, it encourages companies to be safer to avoid worker-compensation and guest-liability incidents. “There is significant motivation to run a safe workforce and to be very safety conscious and to do the best you possibly can,” said Eggleston. “Captives are mostly for workers’ compensation or guest liability, so if you are running a safe operation, you may be able to recoup these dollars in the future as profit.” HB

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