CALL US TODAY (855) 975-4949

Is Your Client’s Captive Modern Enough to Survive?

Insurance is a valuable financial tool that is integral to a company’s risk management efforts. For many firms, the best way to mitigate risk is by pooling resources and establishing an insurance subsidiary known as a “captive”.

Captive insurance has increased in popularity over the past several years, becoming the preferred insurance solution for many firms. It is essentially a form of self-insurance by which companies protect themselves from risks unique to their business instead of obtaining standard insurance from third-party providers.

One of the benefits of captive insurance is that it provides unmatched flexibility over premiums, claims, and coverages. It also offers innovative financing techniques and lucrative dividends. For firms dealing with unique challenges, captive insurance is one of the most efficient risk management solutions available and is often preferable to the standard policies offered by most providers.

As helpful as captives are, they need to meet the demands of modern businesses. As an insurance agent, you will have to help your clients answer the million-dollar question: “Is your captive modern enough to survive in the current business environment?

The value of forward-looking models

One factor that could affect a captive’s ability to meet the demands of the current business environment is the adoption of forward-looking models (FLMs).

As the name implies, FLMs are strategies used by businesses to anticipate future outcomes. The process involves an analysis of procedures and mechanisms that typically affect risks. The primary goal of forward-looking models is to forestall the outcomes of re/insurance risks amidst constantly changing legal, technological, societal, and economic conditions.

If there is one lesson that businesses have learned from the previous year, it’s that they should have done more to protect themselves. As many firms have since realized, insurance is just as crucial for survival as financial resources, providing a safety cushion when calamity strikes.

Even now, companies are still reeling from the effects of the pandemic, with thousands having been forced into bankruptcy. Many more are in equally dire financial straits, and predicting when and what the next crisis will be‒and how to deal with it‒is foremost on everyone’s minds.

The good news is that, unlike in the past, forward-looking tools and approaches can better assess and handle future risks. For many businesses, FLMs could spell the difference between the success and failure of their captives.

Which businesses benefit the most from captives?

Although captive insurance provides the same diversification of risk and security as standard insurance, it isn’t necessarily appropriate for all businesses. Before considering this model, companies should first understand their benefits and drawbacks.

Some of the qualities that make businesses ideally suited for captive insurance are:

  • Financial stability
  • Healthy history of losses
  • Having underinsured and uninsured risks
  • Having 50 or more employees enrolled in a health program

Financial stability

Owning and operating a captive insurance firm entails a significant investment. It is only advisable for a company to pursue this option if it has sufficient financial capability. For companies that have considerable resources, it makes perfect sense to set aside some profits to protect these assets.

Healthy loss history

Captive insurance is beneficial to companies that pay premiums that exceed their claims-related losses. Firms that have a history of high claims won’t usually benefit from captive insurance.

Underinsured and uninsured risks

Many businesses are uninsured for certain risks. For example, some companies neglect getting coverage against litigation, supply chain interruption, or cyber-attacks. Others may be underinsured for risks such as business interruption during a pandemic.

Companies that have both underinsured and uninsured risks are good candidates for captive insurance.

Number of employees in the health program

Companies with 50 or more employees enrolled in a health program will benefit from having captive insurance.

As many employers know, employee health care costs continue to rise, with benefits accounting for up to 35% of payroll expenditure. For companies paying for the healthcare of this many workers, captive insurance could help stabilize coverage and reduce costs.

Conclusion

Efficient captive insurance strategies should consider short- and long-term business objectives. By utilizing captive insurance in conjunction with other risk transfer strategies, companies will be better able to manage risks, reduce insurance costs, weather premium hikes, and generally enjoy broader and more effective risk coverage.

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.