Captive insurance has evolved from its early days as an insurance alternative mechanism meant only for large businesses to insure undesirable or uninsurable risks.

In the past three years, the number of captives available has risen dramatically due to the challenging commercial market and a lack of traditional insurance solutions. Captives 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.

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 like management liability and contingent business interruption insurance.

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 hurricanes, floods, wildfires and earthquakes driving up the cost of insurance in the U.S., a captive offers another coverage option that may be particularly attractive for hotels 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 pre-funding 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.

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 and hotel 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. Hospitality firms still struggling from the effects of COVID-19 are unlikely to be in the right financial position to make a captive solution work.

To determine whether a captive solution is right, hotels and restaurants should:

  • Evaluate their finances. Captive members must be able to set aside sufficient collateral funds to pre-fund 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. Hotels and restaurants 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 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.

Contact HUB International’s hospitality insurance experts to learn more about property & casualty captive solutions.