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Is a Captive a Good Fit for Your Client’s Business?

For over a century, captive insurance has served to protect business assets. This alternative to the traditional insurance market offers significant advantages, allowing business owners to obtain robust coverage for unique or unexpected risks. It may not be the right insurance for every business operation, however. In this guide, we will explore captives with an eye toward helping your clients make smart decisions about the advantages and potential complexities of this insurance option.

Captives 101

As an insurance company created and wholly owned by one or more businesses to insure the risks those businesses face, captive insurance is a powerful risk management solution for business owners. The captives market has grown tremendously over the past 30 years; formerly reserved for the largest corporations, this insurance solution now fits the needs of many smaller businesses as well as non-profit organizations worldwide.

Captives were developed to provide insurance coverage for companies with risks that could not or would not be covered by commercial insurers. In later years, companies with significant risk exposures may have found premium rates in the commercial market unreasonable, leading to the adoption of captives to control costs. Captive insurance provides outstanding coverage, but that is not its only advantage. Captives also:

  • Help to stabilize pricing while reducing the expenses associated with risk funding.
  • Offer the ability to customize coverages for unique or unusual risk exposures.
  • Provide greater control over claims management as compared to the commercial market.
  • Give access to the reinsurance market.
  • Provide tax savings.
  • Allow companies to retain underwriting profits in years with low-volume insurance claims.

Captive insurance is not suitable for every business operation. Determining the best fit for your clients is key to balancing the advantages against potential drawbacks in this self-insurance model.

Are Captives the Right Fit?

Captive insurance offers numerous advantages for business owners. They also represent valuable risk management tools. Even with these advantages, they are not always right for every organization. If your client’s organization is seeking guidance on adopting a captive to provide insurance protection, there are several critical pieces of information to analyze.

First, clients must conduct a feasibility study to understand whether captive insurance is an appropriate solution. In this feasibility study, the following datasets must be considered:

  • The financial implications of forming or joining a captive entity.
  • Projections of expected yearly losses.
  • Projection of operating expenses associated with captive management.
  • Determination of capital levels to support projected risk exposures.

In some cases, these datasets may indicate that a captive is simply not the right solution. There can be steep expenses associated with establishing a captive entity; these expenses are only justified if the potential savings or risk coverage is greater than projected startup costs.

Even if launching a single-parent captive insurance entity is out of reach, there may be other captive-based solutions to consider. A group captive, or a captive entity formed by a group of similar businesses with similar risks, allows companies to share their risks. This is often a suitable solution for smaller businesses that are not financially able to form a captive of their own. Other possibilities include protected cell captives or risk retention groups. Each of these captive models offer the same advantages of single-parent captive insurance entities but wall off the risks between each member. Ultimately, these solutions provide great insurance coverage and cost savings that serve as a viable alternative to the commercial insurance market.

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.