Why Captive Insurance Solutions are Right for Some Companies
As discussed in previous articles, we’re seeing increasingly more states allowing the establishment of captive insurance companies. Most recently, North Carolina, which signed a bill into law back in June allowing the formation of captive insurance companies, announced that it’s full steam ahead with three captive applications pending before the state’s Department of Insurance. Additionally, what was once for decades a solution for Fortune 500 companies and nonprofit organizations, captives are now being presented to small businesses and for different coverage lines. For example, nursing homes, doctors groups, restaurants and others are setting up captives for health insurance and workers compensation.
A captive insurance company is basically a private insurer that is a wholly owned subsidiary of another company. Captives accept the premiums that the company would have paid to an insurer and then cover any claims against the parent company. If the claims are less than the premium, the captive has made a profit, just as a traditional insurance company would. The difference is that the company that set it up benefits, not the insurer.
Captive solutions are good vehicles for many companies. They provide capacity for difficult-to-insure risks. When properly operated, captives provide a positive impact on an entity’s profitability and cash flow and allow for loss prevention as a way of doing business. Moreover, when structured properly, captives can provide tax advantages, further improving their ability to accumulate capital to protect against loss.
There are different types of captives, with the most popular the single parent or pure captive. This type of captive only insures risks of its parent company and affiliates in its corporate family. A group captive insures risks of several insureds in a similar industry sharing joint/group ownership. An association captive insures an association of related members, which may
be outside of one corporate family, such as member companies of a trade or organization.
Sponsored captives are typically sponsored by an insurer and may have individual segregated cells that may be “rented” in order to implement an insurance program.
When should a company consider a captive solution?
There are some signals to look at to begin discussing the formation of a captive. These include:
- The potential for a stiff rise in premiums if deductibles aren’t raised significantly
- Significant exposures that result in high commercial insurance quotes
- An insured requesting innovative and alternative insurance solutions
- The adoption by the insured of an organization-wide enterprise risk management (ERM) effort, prompting analysis of a captive structure to help manage, finance and control costs
- Shareholder pressure to address and control the cost of risks
Of course, certain factors must exist before a company can consider a captive, including ensuring that it has a solid cash position to make premiums and ultimately pay claims. Additionally, start-up and ongoing maintenance costs can be substantial. Such costs typically include a feasibility study, actuarial analysis, initial capital investment and implementation costs as well as annual operation costs. Moreover, it’s critical that management has the ability to focus on the long-term benefit of a captive strategy, realizing that in the short term significant results may not be realized.
Caitlin-Morgan specializes in providing captive insurance solutions. Our expert consultants will assess your clients’ needs and customize a solution that suits them. Give us a call at 877.226.1027.