By: Bill Mackey, CIC
bmackey@bankersinsurance.net | (540) 735-1711
Insurance companies compete against each other, helping to keep pricing in check. But traditional insurance can still bring with it a frustrating lack of transparency and control over premiums, claims handling, and overall expense. Many factors influence insurance cost, any one of which can cause prices to increase. Industry trends and financial market volatility are common examples. Today, supply chain challenges, staffing shortages, and even global politics are causing insurance prices to rise.
But what if your business could own the insurance company? This idea is not farfetched, and businesses do it every day in the form of a captive. A captive insurance company is a separate insurance entity owned by you, the client. Benefits can include:
- Retention of profits – lower cost of insurance.
- Dividends from unused funds.
- Equity position in the captive.
- Increased price stability and control.
- Insulation from market fluctuations.
- Protection from industry trends.
- Increased insurance limits and capacity.
- Insurance coverages not otherwise available.
- Favorable accounting and tax rules.
Target Businesses
A captive insurance company isn’t for every business. Although benefits may begin day one, successful captives require a commitment by leadership and a long-term vision. Ideal candidates are:
- Companies which are consistently profitable for their existing insurance company.
- Entrepreneurial entities with a desire to reimagine business insurance on their terms.
- Businesses with a mindset to be an owner of an insurance company rather than a buyer of insurance policies.
- Mid-sized and large companies paying over $150,000 per year in workers compensation, general liability, and/or business auto insurance. Employers with over 100 employees for employee benefits.
- Businesses with unique risks that are otherwise difficult to insure.
Client Example
During conversations, one of our clients consistently commented how they were frustrated with traditional insurance and the money the insurance companies were making from them. Their lack of control over such a large expense was troubling. Being in the volatile trucking industry, they felt at the mercy of their less safe peers and constantly wondered what their insurance renewals would look like. This inability to budget premiums year to year was a significant challenge as their business auto, general liability, and workers compensation costs were between $300,000 to $400,000. Even more, their loss ratio ran less than 50%, meaning they were very profitable to the insurance company.
We advised them to consider joining a captive. We performed an analysis of claims and premiums which proved a captive warranted serious thought. Insurance costs in the captive would be less on day one and they would immediately begin building equity. This client has now been insured by a captive for five years, each year enjoying a reduction in insurance costs. This fact is even more astounding after suffering a $2,000,000 claim four years ago. Their equity position is nearing $1,000,000, and the owner considers this part of his means to fund retirement.
Further Reference: Semi and Commercial Truck Insurance
How Captive Insurance Works
Captives can streamline and simplify typical insurance processes such as funding, investing, claims processing, and reinsurance, making owning an insurance company a possibility for many businesses. Single parent captives are owned by one business and, although a highly desirable option, such entities require large amounts of insurance premium to get started. Group captives are the most popular choice for many clients as the premium requirements are much less as they are shared among other owners.
Captives typically segregate funds held in reserve for claims into two accounts, an A fund and a B fund. The A fund is money held to pay claims and thus is “at risk”. Think about the A fund like a deductible for the captive. The B fund is protected by reinsurance. Did you know insurance can be insured? In this B fund, claims over a certain amount are paid by a reinsurance policy. This is the reason our client’s insurance costs continued to drop despite the fact he had a $2,000,000 claim after joining the captive.
The first captives were founded in the early 1900’s, however their popularity has skyrocketed since around 2006. Today, they continue to adapt to the needs of their owners, making owning an insurance company attainable to more businesses. Contact Bankers Insurance if your business is interested in participating in an existing captive or starting a new one.
Questions regarding captive insurance? Contact your Bankers Insurance agent. Not a client of ours? Let us earn your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.
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