How is a group captive different from simply self-insuring?
Self-insured often means uninsured. A group captive is owned by its members.
According to Jack Meskunas, Managing Director at Oppenheimer, people who say they are self-insured frequently mean they carry no policy and would absorb a loss themselves. He describes that as gambling with the balance sheet rather than insurance. In a group captive, by contrast, the members are both the insureds and the owners, which he says generally aligns everyone's incentive to control risk.
Meskunas recalls people saying they did not need insurance because they were self-insured. What they usually meant, in his telling, was that they had deep pockets and would replace the car or repair the house themselves if something went wrong.
His objection is definitional. Insurance exists to remove or lower a risk in exchange for premium and a defined amount of coverage. Absorbing a loss on your own balance sheet does neither, whatever it is called.
Key takeaways
Saying you are self-insured often describes having no insurance rather than a funded arrangement.
In a group captive, members are both the insureds and the owners.
Meskunas says claims are generally lower because members have a direct incentive to control risk.
A group captive works differently because ownership and coverage sit in the same hands. Meskunas describes it as the insureds being owners and the owners being insured, which he says removes both the reason and the opportunity for insurance fraud, since defrauding the insurer would mean defrauding yourself.
He adds that captive claims are generally lower, in his experience, because members are acutely aware of their risks and spend time learning to control them. He is careful about why: the risks do not go away, people are simply more careful, and there is a profit incentive because whatever premium is left after claims may be surplus.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“Captives have much lower claims in general because they're acutely aware of the risks and they spend a lot of time learning how to control them.”
Transcript
Read the full transcript 32 turns
which is what is the real difference between self-insurance,
joining a group captive or doing a single parent captive? Well, self-insurance is a funny word
because I one of the things I do remember, even from being much younger, was people saying,
I don't need insurance. I'm self-insured. And what that really meant was they didn't have
insurance. Correct. They had they had deep pockets and they felt if they thought they had deep pockets.
And so they felt that, well, you know, if something goes wrong, if my car gets stolen,
if my house burns down, I'll just buy another one. I'll just fix it myself. That's not insurance.
That's gambling, really, with your with your risk. And gambling in your balance sheet,
right? And we're about yeah, gambling with your balance sheet. And so and that's the reason that
insurance exists is to remove some of that risk to lower the risk. In exchange for your premium,
you get, you know, you get a defined amount of coverage. When you talk about a group captive,
group captives are fascinating to me. And I love the whole theory that or the way it works,
which is that the insurance are owners and the owners are insured. So it's so it goes back to the
example that you made about the crew team rowing together. Everyone's rowing in the same direction.
There's no there there's there would be no reason or opportunity for insurance fraud
because you would be defrauding yourself if your insurance company. Subsequently,
they generally claims are lower. Captives have much lower claims in general because they're
acutely aware of the risks and they spend a lot of time learning how to control them. It's not
that the risks go away, but they they're more careful. People are more careful. There's more
incentive. And there's incentive because there's a profit incentive. You they every, you know,
the insurance in a group put their premium in. They get their insurance policy for the year.
They can see their performance what the claims were during the course of the year. Whatever's left
over is profit. And since the overall cost structure of running a captive, whether it's a
single parent captive or a group captive, you know, they're generally lower. So the profit margins are
higher. And ultimately what you the goal is to build surplus up in the captive so that at some
point distributions can be given back to the insureds. And they actually get a refund of premium. You
can, you know, in a commercial market, you use an example for real estate. You pay your
homeowners insurance every year. When you sell your house 20 years later, and they say, gee, you
didn't have any claims. We'll just give you back half of your money. That just doesn't happen.
So but this is a case where when you have good performance, good insurance performance,
good investment performance, those two are very powerful things to combine to prevent to create a
profit potential for the for the insureds
The views expressed are those of the featured guest, drawn from a recorded conversation, and reflect their own professional experience. Nothing on this page is insurance, tax, legal, or investment advice. Consult your own advisors about your specific situation.
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