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The Benefits of Captives in a Hardening Market

For many years, businesses of all sizes and types have relied on the flexible and advantageous protections of captive insurance. Captives, a viable alternative to the traditional insurance market, hold many benefits for the companies that use them. Today, those benefits are more attractive than ever before, especially as traditional insurers raise premium prices and withdraw coverage. In a hardening market, captive insurance may be the sole insurance solution available to companies with unusual or high-risk exposures.

The Hardening Insurance Market

After enjoying years relatively affordable insurance rates thanks to soft performance in the traditional insurance markets, those markets are experiencing shifts that can impact business owners. In a soft market, insurers tend to lower their underwriting standards and keep premium pricing stable. As of the third quarter of 2020, however, the market has begun a trend toward hardening.

Hardening markets are influenced by several factors, including:

  • Economic uncertainty.
  • Volatility in financial markets.
  • Less competition within the insurance industry.
  • Higher frequency and/or severity of claims.
  • Global events, including the coronavirus pandemic.

As insurance markets continue to harden, many business owners are discovering that their premium costs are rising out of control. They may also have existing insurance coverage withdrawn or cancelled as their insurer leaves the property and casualty market.

Captive Insurance to the Rescue?

Captive insurance was originally designed to allow companies to fund and manage their own risks. By self-insuring their risks, business owners gain better control over costs and claims. There have long been significant advantages associated with captive insurance, including:

  • Ability to return profits to stakeholders in years with low claims volumes.
  • Tax advantages.
  • More granular risk management oversight.
  • Ability to add or modify coverages to suit the insureds under the captive policy.

While these advantages have made captives an attractive solution for some of the largest corporations and small businesses alike, their most important advantage is that they provide insurance coverage when the traditional markets cannot or will not.

The Role of Cell Captives as a Self-Insurance Option

Captive insurance is a valuable solution to the challenges presented by a hardening market. Unfortunately, setting up a captive can be expensive and complex to manage, potentially putting it out of reach of smaller business. Here, cell captives may be an answer. Cell captives allow businesses to pool their resources while segregating their assets from the risks of other members in the pool. This innovative solution also allows for businesses to investigate the best ways of financing risks both from premium cost and coverage aspects. Captives set up in this way may have to secure relatively large premium payments in the first year to account for a claim that can happen at any moment, but future years’ premium payments would be significantly smaller. If a large claim or high number of smaller claims do not occur – a worst case scenario in that first year – that capital can be retained for future use, setting the stage for long-term stability. Captive insurance continues to provide attractive benefits, no matter what happens in the traditional markets. By giving better control over claims management and pricing, even businesses with unusual or unexpected risks can gain valuable protection against losses.

About Caitlin Morgan Captive Services

Caitlin Morgan Captive Services provides clients with captive insurance solutions supported by years of experience in establishing the successful formation and implementation of a wide range of captives. To learn more about how we can help you, please contact us at (855) 975-4949.