The hospitality industry has been one of the beneficiaries of the surge in captive solutions for not just employee benefits, but property and casualty insurance. This includes workers’ compensation, general liability, property and ancillary coverage lines, such as management liability and contingent business interruption insurance.

For Tribal-owned hospitality businesses, such as restaurants, hotels and casinos, this alternative insurance program is structured to transfer risk from operating entities to the captive. But what exactly is a captive and is it the best fit for your enterprise?

What is a Captive?

Evolved from its early days as a way to insure large businesses saddled with undesirable or uninsurable risks, today’s captive is an alternative insurance company whose primary function is financing the risks of its owner. For the past several years, captives have become more popular due to the challenging commercial market and lack of traditional insurance solutions. They have expanded to cover additional insurance lines, offering more capacity and lower premium thresholds. As a result, businesses of all shapes, sizes and industries have access to group captive solutions for sharing risk.

Captives are formed for many reasons, including reduction in the parent company’s total cost of risk, lack of commercial market for certain lines of coverage, the desire to capture underwriting profits and investment income that would otherwise be earned by the commercial underwriter and to access the reinsurance market.

They are almost always incorporated and licensed in jurisdictions established as captive domiciles, which all share a common characteristic of a favorable regulatory regime. This reduces the regulatory process and capital requirements imposed on the captive relative to commercial insurers. In addition, established domiciles have a well-developed support infrastructure to provide management, legal, banking and actuarial services.

Advantages of Captives

Protecting against the myriad risks faced by hospitality companies is increasingly challenging outside of captive solutions — in both securing the coverage and paying for it.

With the rising number of wildfires, earthquakes and extreme weather events driving up the cost of insurance in the U.S., a captive offers another coverage option that may be particularly attractive for hotels, casinos and restaurants located in catastrophe-prone areas. A lack of hospitality contingent business interruption in the traditional marketplace also has led to the interest in captives.

But with a captive solution, hospitality firms retain a layer of risk while prefunding their expected losses. Through the captive, they gain access to a broader reinsurance market with capacity that would be otherwise difficult or impossible to obtain. The captive members can also benefit by sharing in any underwriting profits gained when actual losses beat actuarial expectations.

Tribal business owners can choose to work with independent third-party administrators, which gives them additional control during the claims process and can positively impact captive profitability.

Evaluating if Captives are a Fit

While captives may be a great solution for many restaurant, hotel and casino groups to meet their risk transfer and financing objectives, they’re not a universal solution.

Best-in-class businesses that consistently adhere to their risk management controls are best suited to captive solutions. To determine whether a captive solution is right, hospitality firms should:

  • Evaluate their finances. Captive members must be able to set aside sufficient collateral funds to prefund their risk for at least the first three years, in addition to paying the standard commercial premium.
  • Consider loss history. A key benefit of captives is the ability to earn back some of the premium paid for insurance with low claims frequency and severity. Hospitality businesses with poor loss history and a loss experience ratio greater than 60% are not good captive candidates.
  • Make sure their risk management program is solid. Since hotels, casinos and restaurants in captives retain a significant amount of their own risk exposure, companies need to ensure they are comfortable with their risk management program and confident about their future loss experience ratio.
  • Educate themselves. Meet with a captive consultant to determine whether the company would be a good fit and learn about the structure of the captive and the lines of coverage available. Most consultants will also analyze the company’s last five years of loss experience to determine whether a captive is the right solution.
  • Look for like-minded companies. Since captive members share the risk, it’s important to find a captive with companies that also make risk management a high priority.

As Tribal operations expand and diversify into various industries, it’s important to partner with an experienced and knowledgeable team with expertise in captives and alternative risk tailored to fit your specific needs. Contact HUB International’s Tribal hospitality insurance experts to learn more about Property & Casualty captive solutions.