Captive insurance is a form of self-insurance where businesses create their own insurance subsidiary to insure their own risks. Captive insurance allows businesses to have more control over their insurance costs, coverage, and claims experience. Due to large premium increases, carrier capacity and appetite changes, and claims frustrations, more and more business owners are looking for captive solutions to insure their commercial business risks.
There are many different options for captives available to business owners. Let’s look at a few different captive structures:
Single-parent captives are the most common type of captive insurance, where a single company creates its own insurance subsidiary to cover its risks. Single-parent captives are more flexible and broad in what can be covered. However, the formation of a single parent requires more capitalization and premium dollars to support itself.
Group captive is formed by a group of companies that come together to create their own insurance company. Within a group captive structure, you will find groups can be formed heterogeneously (a diversity of companies) which allows the group to spread their risk amongst different industries. Groups can also be formed homogenously (similar companies) which provides insurance coverage for similar industries or groups of risk.
Group captive insurance allows these companies to pool their resources together to purchase insurance for their collective risks. The captive insurance company which is formed, is then owned, and controlled by its members, and each business will have a stock purchase requirement to be admitted. This allows each member to share in the financial risks of the company, as well any profits or losses.
A rent-a-captive is a captive insurance company that is leased by multiple companies to share the risks and benefits of captive insurance. Much less common than the prior two examples, this arrangement allows members to “rent” its facilities to outside organizations. This provides the benefits of a true captive program without the large financial requirements found with other captive structures.
Protected Cell Captive
A protected cell captive is a commercial captive insurance company that has separate cells, each of which is dedicated to a specific member company. Each cell operates as a separate legal entity, which allows for greater flexibility and customization of insurance coverage.
Benefits of Captive Insurance
There are several benefits to using captive insurance. One of the main advantages is that it allows companies to have more control over their insurance costs. Captive insurance eliminates the need for a middleman, which can reduce administrative costs and premiums (typical operating costs are nearly half of traditional insurers). Captive insurers can also customize their policies to fit the specific needs of the insured, which can provide more comprehensive coverage.
Captive insurance can also provide tax benefits. For example, premiums paid to a captive insurer are tax-deductible, and the captive insurer can invest its reserves tax-free. A business that is part of a captive has autonomy with these funds in addition to any of the dividend reimbursements they achieve off their claim’s performance.
Another benefit of captive insurance is that it can improve risk management. By creating their own insurance company, insured’s can better understand and manage their risks. Captive insurers can also provide more transparency and control over claims management, which can help reduce losses and improve risk control. For example, Legacy Insurance (a Leavitt-owned group captive) provides robust risk management services, including access to a dedicated risk management team. This service can help prospects who are contemplating the jump into an alternate risk transfer model. It also provides ongoing assistance, training, and education to current members within the group.
Captive insurance is not for everyone. It is generally only suitable for larger companies with significant risks and insurance needs. Captive insurance requires a significant investment in time and money to set up and maintain. It also requires a certain level of expertise in insurance and risk management. As a performance-based insurance product, claims and loss ratios will be a big portion of the underwriting and evaluation of the risk overall. In a group captive example, it is important to note members are voted in by their peers and considered by their peers prior to entry. So, if a company has historically struggled with finances, claims, or proactive risk management, they will not be an ideal fit.
Before considering captive insurance, companies should carefully evaluate their insurance needs, risks, and financial resources. They should also consult with experienced insurance professionals and legal advisors to determine whether captive insurance is the right choice for their business.
To learn more, contact Joe Ellis at https://www.leavitt.com/dixie/staff/joe-ellis.