Due to growing interest in captive insurance for workers’ compensation, Captive Planning recently successfully implemented a captive insurance company for one of its clients in the nursing home industry.

Traditional insurance programs have never been all that effective for workers’ compensation and other relevant types of coverage, as there is simply too much room for error and inefficiency between the company and provider. Long waits for claims administration and other issues can dash the hopes of getting an employee back on his or her feet quickly, while a wealth of other problems will hinder budget management in a variety of fashions.

Workers Compensation Insurance presents a special difficulty for captives, since they are usually not licensed to underwrite such insurance directly. This does not mean that captives cannot participate in workers’ compensation arrangements. They can and do, through what is known as “fronting arrangements”.

In a typical workers’ compensation fronting arrangement, an insurance company that is licensed to offer workers compensation insurance issues the policy to the business. This insurance company, known as a “front company” or sometimes “fronting carrier”, is fully responsible for claims made by workers against the policy.

As such, in order to reduce the cost on their $7.1 million workers’ compensation premium and gain better control over the claims settlement and payment terms, the company structured a high deductible reimbursement plan where it took the first $500,000 of each claim, resulting in a significantly lower premium. Part of this reduction in premium was utilized to purchase stop-loss insurance in the captive to cap any catastrophic claims in excess of $5.0 million on an annual basis.

Through the establishment of a captive, as an alternative risk management vehicle, the company was able to realize a significant decrease in the premiums it was paying for its workers’ compensation insurance in the commercial market place. Moreover, it allowed management to; (1) customize coverages in concert with its risk tolerance level; (2) manage the investment surplus and reserves; (3) control the claims payment and underwriting processes.