As worker compensation premiums continue to soar in California because of fraudulent claims, higher health costs and a poor loss experience in the restaurant industry, many companies will want to revisit using a “Captive” or self-insured approach.
A Captive has many advantages for larger restaurant companies with good safety records and MODS.
The benefits of the captive would be:
- Consistent pricing – by buying as a group and by creating a cleaner block of premium, members would be able to more effectively control their pricing for years to come. The dramatic fluctuations of the CA soft and hard markets would be eliminated.
- Member owned – each operator would not only receive a policy from the captive, they would be owners of it, eligible for distributions of capital once profitable.
- Invitation only – all participants would have to commit to certain safety standards, loss control, and claim management philosophy. Existing members would vote to allow new members in.
- Elevated claim control – by using our technology-driven claim control, claims cost would reduce significantly over the current carrier standards.
In order to determine the viability of the captive, you first need to model each operator’s loss experience. It solely allows you to determine the viability of this solution for each operator. Provided it looks like the right path, your insurance provider should review the steps to launch the captive and the commitment that each member must make. Initial members will make the key decisions related to the operating agreement (i.e. how distributions are made, how operators can exit, etc.)
Information that a carrier would need to determine the viability of a captive will include:
- Last 5-years of historical payroll by class code.
- Last 5-years of loss runs.
- Last 5-years of premium history.
A captive function just like an insurance company but gives the members more control of their future workers’ compensation insurance cost and provides more aggressive risk management and claims control. The captive will produce a quote for each member every year at the renewal date. That will constitute the premium each member will pay for the upcoming 12 months. Each member will also be responsible for collateral funds in the amount of roughly 25% of the annual premium. The captive will then administer and pay for all claims up to $350k in size – reinsurance will cover any large loss over this amount. In a group captive, all of the members share the loss fund. In a captive group, 60% of all premiums are reserved for losses – the remaining 40% is reserved for captive operations just like a traditional insurance company.
If you are interested in finding out more about captive groups and how they have performed in the restaurant industry, please contact us.
About the Author
Jean Hagan, Principal
Jean has owned, operated, and consulted in the restaurant industry for more than 30 years. During that time, she worked with a well-known national chain; owned a food and beverage company that operated multiple restaurants, bars, and event spaces in the Squaw Valley area; and became the president, CEO, CFO, and shareholder of one of the highest-grossing restaurants in California. Today, Jean is Principal and leads the Restaurant Operations Consulting practice at KROST. » Full Bio