Considering Captive Insurance? Ask These 5 Important Questions

Insurance has always been an important part of the business landscape. Insurance protects business owners and assets against a wide range of risks, helping to provide coverage for liabilities both expected and unforeseen. Traditional insurance is not always the right option, however, and more companies are turning to captive insurance solutions. Captive insurance is a company or program established for the purpose of providing comprehensive insurance protection, regardless of risks. There are many advantages to captive insurance solutions; in this guide, we will present five important questions to ask when considering whether a captive is right for your business risks.

Captive Insurance Solutions: An Overview

A captive insurance company is defined as a wholly-owned subsidiary company that provides insurance products and services for its parent. In other words, a company may establish its own insurance company for coverage, giving rise to the term “self-insurance”. This is not the only captive insurance model; one company may establish a captive for a group of similarly-sized and configured companies, allowing group members to enjoy the benefits of captives.

In general, there are five major captive insurance models:

Single-Parent Captives – captives owned by one company for the purposes of providing custom-tailored insurance services for the parent.

Multiple-Parent Captives – joint ownership of a captive by a group of companies or individuals in the same industry.

Rent-a-Captives – a captive that offers memberships for smaller companies that may not have the size or financial resources to form their own captive.

Heterogenous or Joint Venture Captives – for companies in different industries, this captive model allows for pooling of resources and robust insurance protections.

Protected or Segregated Cell Captives – a captive model that is owned by multiple entities or joined through memberships. Each member is protected from the others in terms of assets, liability exposures, and claims.

The advantages of captive insurance solutions are many, and include favorable taxation, profit-sharing, and insurance tailored to the unique needs of the parent company or captive member. Captives may offer lower premiums and more availability when compared to traditional commercial insurance options.

Is a Captive Right for You? Five Factors to Consider

Now that we understand the role of captives and the most common captive models, many companies may wonder if this insurance solution is right for them. Despite the many advantages of captive insurance solutions, this reinsurance model is not right for every business interest. Five factors to consider are:

1. Costs associated with traditional insurance premiums – captives can be asset-intensive to set up and manage. If your company typically experiences $1 million or more in annual insurance premiums in the traditional market, captives may be an attractive and cost-effective solution. Below the $1 million premium threshold, captives may not make as much sense.
2. Loss histories – if losses are historically low, but traditional insurance costs continue to rise despite your company’s risk management strategies, captives can represent an excellent option. Captives are better protected from market fluctuations, especially those caused by frequent or excessive claims of other insureds.
3. Risk tolerance – companies that choose captives as an insurance option face certain risks, particularly in relation to unexpected or excessive losses. Those unexpected losses can negatively impact profits. So, risk tolerance is a critical consideration; if your company can handle the risk exposure, it may be able to handle the potential risks associated with a captive.
4. Inability to cover all risks – traditional insurance companies offer a wide range of products and services. Unfortunately, not all industries enjoy seamless, comprehensive coverage through the traditional market. Certain industries, like healthcare or financial services, may not be able to obtain appropriate coverage at all, or may find traditional coverage prohibitively expensive. Captives, then, are an attractive alternative, offering customized and comprehensive coverage at lower rates.
5. Management – captives can be difficult to set up and to maintain, depending on myriad state and federal regulations. Having a dedicated project or captive manager to focus efforts is invaluable. Without this careful management, captive insurance solutions may not be the best solution.

When these factors are considered, captives represent a viable alternative. The captive insurance market is growing rapidly, making this insurance solution not only an attractive option, but one that can provide the dedicated coverage and cost benefits companies need to thrive in competitive marketplaces.

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.