A contractor’s strategic plan goes beyond day-to-day positioning and operations – it evaluates opportunities, contemplates unforeseen risks, and demands return on investment. However, in light of the prolonged economic recovery, many contractors remain cost-conscious when developing their strategic plans. Investment in property and equipment, additional labor force, and professional development is often delayed until the lack thereof becomes a critical constraint on operations.

So how can contractors seize strategic opportunities and proactively manage risks while watching the bottom line and containing costs? One such solution lies in captive insurance programs – specifically group captives. (Other types of captives are beyond the scope of this topic.)

A captive is a vehicle that provides required insurance products and other ancillary benefits to its members. Captives offer contractors transparency into insurance costs, greater control of future expense, and significant advantages beyond traditional insurance coverage – all while maintaining cost control and keeping cash flow in check. This article will explore ways in which a captive can benefit a company in meeting its strategic goals.

How Does a Captive Work?

A captive offers similar insurance coverage to that of traditional commercial insurance companies to meet an insured’s risk management needs (e.g., general liability, professional liability, workers’ comp, property and business interruption, employee benefits, and automobile liability). It is owned and managed by its members and can operate in similar or differing industries, known as homogeneous and heterogeneous captives, respectively. (Given specific risk factors in construction, homogeneous captives are popular among contractors to underwrite risk profiles common in the industry.)

Members have transparency into and influence over the captive’s operations through a seat on the board of directors. They determine eligibility requirements, which often results in membership with better loss history. Annual premiums are based solely on the members’ loss history instead of the combined impact of the members’ loss experience, the general loss experience of the particular industry, and insurance marketplace trends. Any losses sustained are funded by the member’s premium and potentially the premiums paid by other members. The captive is reinsured to protect members in catastrophic loss situations.

Many types of captive insurance programs exist, and determining the structure that best fits a contractor’s needs is key. Since the right structure varies for each company, it’s important to understand the benefits of different programs.

Ancillary Benefits

Ideal captive candidates are well capitalized, maintain good liquidity ratios, invest in safety programs, perform well in the field, and generally operate under a well-defined strategic plan. Membership in a captive insurance company can be cumbersome to unwind and financial obligations can remain for a period of time after the contractor exits the captive. As such, contractors with recent significant insurance claims, a history of reportable incidents, weak cash flow, or poor financial performance may not qualify.