Written By: Roland GuillenNow that I’ve got your attention, did you know a mid-size business can earn back 60 percent or more of its unearned insurance premiums? Business owners know there are plenty of risks that could impact their business. These risks cannot always be avoided, but they can be anticipated. For years, business owners have utilized a captive insurance company to plan for those risks by insuring their business, while reducing out-of-pocket expenses and creating another source of revenue.
What is a Captive Insurance Program?
The owner of a business may decide to retain some of its own risk and join a captive insurance program instead of purchasing insurance from a third-party carrier in the traditional insurance market.
This is an attractive option for companies who find limited availability of certain types of insurance coverage in the commercial market or find that those coverages will be a significant expense. Types of coverage that could be included in a captive are workers’ compensation, commercial auto, and general liability.
Today, the captive market is as active as it has ever been, with its benefits now attracting worldwide attention. Captives are widely used both domestically and abroad. A.M. Best estimates that there are more than 7,000 captives worldwide. While Bermuda, the Cayman Islands, Barbados and Guernsey have historically been the most popular domiciles for captive formations, many of the captives formed today are in the United States.
Benefits of Captives
Captives can bring many benefits as alternatives to other risk financing plans. Properly structured, captives can bring the following advantages:
• Lower insurance costs – By self-insuring within a captive, the profit of the insurance company is essentially eliminated from the premium cost that a company would pay. Additionally, most captives are selective as to the risk profile of the companies it allows to become members. The result is a group of companies with lower loss experience and, therefore, lower insurance costs. In a captive, these savings find their way back to the participants in the form of reduced premiums or dividends.
• Control of claims process – When companies experience claims in traditional insurance coverages, they are at the mercy of the insurance company handling the claim and are subject to the decisions they make in managing and closing out the claim. Captives manage their own claims and normally select partners to manage the captive’s claims. Captive members are more involved and have more discretion over how claims are managed and settled, which usually results in lower costs.
• Flexibility in managing coverage – In buying traditional insurance, many companies may not be able to find a suitable structure for managing specific risks or may not be able to find coverage at all. Within a captive, the owners have a say in how coverage is structured, how much risk to retain and what levels of deductibles make sense. This flexibility allows companies to strike the right balance of risk.
• Information sharing – There is an important benefit of being in a captive. Most companies who participate in captives are serious about managing risk and are incentivized to help each other improve the overall results of the captive. This results in the sharing of best practices among participants to help everyone lower their loss experience and improve the results of the captive.
Is a Captive Right for You?
Captives can be valuable strategic risk management tools, but they are not the best approach for every organization. For some risk profiles, they are not feasible, and could ultimately cost more than traditional insurance. If your business is considering a captive insurance program, there are several questions that you should consider about your company and the captive program itself. Join us next month, for a deeper discussion about what to ask when considering a captive insurance program.
Warren G. Bender Co.
The insurance professionals at Warren G. Bender Co. are committed to helping you implement the best risk management solutions for your business. Contact us today for more information.