Who is a group captive not right for?
A poor claims history is the disqualifier.
According to Jack Meskunas, Managing Director at Oppenheimer, existing owners and the captive manager vet anyone joining a group captive, and the first thing they ask for is claims history. In his view a business with a severe or ongoing loss record does not belong in a captive, because the arrangement would not pay for itself at the premium that business would contribute.
The vetting is done by the people already carrying the risk. Meskunas describes existing owners, the insureds and the captive manager reviewing a prospective member, and claims history being the opening question.
The reasoning is arithmetic rather than moral. A business with a bad enough loss record would not pay for itself inside the pool.
Key takeaways
Existing owners and the captive manager vet new members, starting with claims history.
A severe or ongoing loss record generally makes a group captive unsuitable.
Meskunas describes better risks moving to captives as adverse selection in the commercial market.
He extends the point to what he says happens in the wider market. As captives take the better risks, the businesses that cannot control their losses remain in commercial insurance, which he characterises as adverse selection.
He is describing a pattern he observes rather than offering a market forecast. The useful part for a prospective member is narrower and more concrete: if your claims record is poor and ongoing, a group captive is likely to be the wrong instrument, and the existing members are the ones who will say so.
From the conversation
Jack Meskunas
Managing Director, Oppenheimer
“if someone has terrible claims track record, they don't belong in a captive”
Transcript
Read the full transcript 32 turns
But who are, who are captives not right for? Especially group captives in particular.
Sure. Well, the great thing about a group captive is you have the, existing owners,
the insurance, and the captive manager vetting new people that are coming into the captive.
Correct. So, the first thing question that they're going to ask them is, let's hear claims history.
And if someone has terrible claims track record, they don't belong in a captive. Because they're
just, they're, they'll never pay for themselves. And so, and this is why actually,
in commercial insurance, they get something called adverse selection where, the people who are,
have, are so bad at controlling their own risk, and have so many claims, they'll,
no captive will ever accept them, nor would they set up their own captive because they would just
lose money. So, they'll stay in the commercial insurance market. And so, what happens as captive
has become more and more popular, worse and worse risks go into commercial insurance.
It's a doom loop. Exactly. It's the best, the best companies join the captive. Their rates
keep going down. The worst companies, they stay in commercial insurance. Go back to our illustrations.
One of the illustrations we made was, captives are a la carte. You go to a restaurant, you pick
the best food, whatever you don't eat, you take home with you. That's your underwriting property,
your investment income. And the commercial market is, a buffet. It's a bunch of mediocre food.
There's certain people that'll eat 15 plates of it. Other people, you know, maybe healthy people,
they'll go and they'll pay for the same, they'll subsidize a person eating 15 plates, they'll eat
their bit, and you can't take anything home from a buffet. It's not allowed. Absolutely.
So, it's, no, and you're, and you're 100% right. And the, and so the captive, a captive is,
won't work for someone who has very severe claims, or they are ongoing, you know, ongoing claims,
and that would just not be supported by what their premium would be in a captive. So,
the great thing about that is, you're automatically precluding anyone from being in this captive,
that you know is a bad risk. Insurance, commercial insurance companies would love to be able to do
that, but they can't do that. So, it's not the business model. So, they, use, it's literally
a theory called the law of large numbers. They, the idea of a commercial insurance company is to get
so many people in there, as insurance, that all the crummy risks are paid for by the people who
are good risks. And the captains are the Navy Seals. They're the few. Right. They are the ones,
they are the ones where you get them together. They care about risk, they care about control,
they care about their money, they care about profit, they care about getting a return on their
investment, and they love the idea that a large chunk of money that they put in for their premium
is probably going to be returned back to them with, interest and returns over years
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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