Workers compensation is a line of coverage that has long been at the heart of many captive insurance programs.

It's also a line that lends itself particularly well to what are seen as some of the key advantages of captives—the ability to better understand and control losses and a heightened ability to identify safety and risk issues and allocate costs to various areas of an organization based on their loss performance.

“There are some new captives doing this and also some of them that had workers comp in them that still have it in there,” said Andrew Sargeant, chief operating officer of USA Risk Group Inc. in Montpelier, Vt.

“Over the years, some of the retentions went up when markets got hard and then came down when markets softened,” Mr. Sargeant said. “Some of it is fronted; and others, it's just a high deductible, and others, it's just a high (self-insured retention) and corporate is putting it in the captive.”

“Probably one out of three (captive) programs involves workers comp,” said Derick White, president of Strategic Risk Solutions (Vermont) Ltd. in Burlington, Vt. “Lately what I've seen is it's just been deductible reimbursement,” he said, with the parent company using the captive to finance its workers compensation deductible.

Involving a captive in its workers comp program has worked well for White Plains, N.Y.-based Starwood Hotels & Resorts Worldwide Inc., which has a high-deductible program.

Starwood, which operates hotels under brands that include Sheraton, Westin and W Hotels Worldwide, takes $900,000 in excess of a hotel deductible of $100,000 per claim at its California hotels, and $950,000 in excess of $50,000 per claim for hotels in other states, said Stephen Truono, vp of global risk management at Starwood.

“Our insurance transfer risk deductible is $1 million, so obviously the captive is taking the difference,” Mr. Truono said.

As it introduced the large deductibles in 2004, Starwood also provided hotel managers with safety training and tools to help reduce losses.

Perhaps the greatest benefit in involving a captive in a workers comp program is in being able to better control exposures, identify problem areas and ultimately reduce losses, Mr. Sargeant said.

“That's what a captive enables you to do because each of the (subsidiaries) gets their own policy and you can see what their loss experience is,” he said. “It also helps you focus on problem areas.”

At Starwood, involving the company's Vermont-domiciled captive in the workers comp program in that fashion “gives us a lot of flexibility in instituting various safety and risk control and claims and injury management programs,” Mr. Truono said.

“It gives us access to manage the risk within the burning layer, if you will, which is where the majority of the claims come in,” he said.

For many organizations, said Mr. Sargeant, involving a captive in the workers compensation program serves as a “cornerstone” of their workplace safety efforts. “You look across subsidiaries and what some subsidiaries are doing and what works, and it's a good way to compare,” he said.

“It's one of the easiest lines to focus on trends or problems and then go after them and fix them,” said Mr. White.

Placing the captive at the heart of the workers comp program can offer other advantages as well.

“It enables us to also manage the cash flow associated with those premiums that would otherwise be paid to an insurer,” Mr. Truono said. “And obviously, it enables us to benefit from the better-than-expected experience if we should realize such, so that the monies we save are saved directly to the bottom line and not going to an insurance company.”

“We also get to utilize some of the funds that we would otherwise pay as risk transfer toward the funding of safety and claims programs,” he said. “We also have better access and control over the allocation of what we charge each of the participating hotels.”

The captive also can provide a way to get the benefit of investment income, said USA Risk's Mr. Sargeant. If the company can qualify for favorable tax treatment, that can be another plus, he said, but added that tax treatment isn't at the forefront of factors driving decisions to put workers compensation in a captive.

“I've got a number of captives that are nonprofits, 501(c)s and they're putting workers comp in the captive as well,” Mr. Sargeant said.

For some companies, the captive also can be used as a tool to ensure that subcontractors meet their workers compensation responsibilities.

“We formed three construction company captives last year and all three involve bringing the subcontractors into the contractor's captive,” said Strategic Risk Solutions' Mr. White. “That way, they know that the subcontractor has workers comp; and secondly, they know that it's being paid for because they're charging the subcontractors the money.”

For smaller companies or organizations that might not have the scale to create a stand-alone captive, group captives can provide a solution to tapping an alternative risk transfer approach in a workers comp program. “It works if they can get together through an association or something like that,” Mr. Sargeant said.

Through a group, companies can get the benefits of group purchasing and put themselves in a position to be able to retain more risk, he said. “It helps with the pooling of risk, to spread the risk around.”

At Starwood, involving the captive in the workers compensation program has been highly successful, Mr. Truono said. “We've been doing this for a number of years and it's been a very positive venture for us and we envision continuing doing it,” he said.

And in general, workers compensation likely will continue to occupy a significant place in the U.S. captive market, Mr. White said.

“It will always be a mainstay in captives,” he said.