Blog | Risk Management Advisors

Advantages of Captive Insurance Companies

Written by Risk Management Advisors | Apr 15, 2020 6:19:09 PM

 

 

Intro: Traditional Insurance Companies Are Costing Your Business a Fortune

If you’re a business owner, you’re probably all too familiar with paying vastly more in premiums than you ever receive in a payout.In my experience, this is the reality for 99% of even the most successful of organizations.Now, I’m not trying to vilify and demean traditional insurance companies. The goal of these businesses is to generate profits while pleasing investors and board members.And revenue increases for such a company aren’t likely if their model is centered around meager premiums and monstrous payouts.

How Can Your Business Offset Insurance Costs?

Many businesses do end up feeling somewhat hamstrung due to the less-than-ideal terms of their insurance contracts.You can scour the ends of the earth for an insurance partner that won’t dip severely into your profits. There’s almost a 100% that you’ll return emptyhanded and extremely discouraged.Well, what if I told you that you can start your own captive insurance company that’ll help you control costs over the short, medium, and long term?Let’s take a closer look at all that’s involved in a captive insurance company:

What is a Captive Insurance Company?

For the expressed purposes of writing property and casualty insurance to a select group of insureds, captive insurance companies are C-Corporations or are a legal entity that’s taxed as such.Starting your own captive insurance company allows you to lower commission, lower state taxes, control your investment, and set your reserves. Such control over your insurance offers the following tremendous long-term, big-picture benefits:

1. Handling Your Own Claims

Workers comp generally offers a 50% margin with traditional insurance. In other words, these companies expect to pay $500 thousand on $1 million.Now, if the end-of-year claims are $800 thousand, the traditional insurance provider can set higher reserves to capture the extra $300,000. Even if only $100 thousand has been paid out, the company can add on that amount to your premiums for the proceeding three years.Conversely, your own captive insurance company doesn’t have to deal with the operating expenses, overhead, or profit requirements as traditional carriers. Also, there won’t be any issues with maintaining high rates to cover losses that stem from high-risk insureds.Your captive’s primary focus is on your own company, and its purpose can strictly be to lower insurance costs via enhanced risk management.

2. Paying Yourself

Setting your own reserves and claims allows you to accumulate dollars at a far more significant rate for your company.When paying money to your own captive company, it can be held onto through your reserves. That money can also be invested to generate a more sizeable long-term return.Here’s a scenario:Imagine you have $500 thousand in standard claims. Couple that with paying $1 million to your own captive company combined with $100 thousand in claims. In this case, you’ll hold onto $900 thousand in your account inside the captive company while receiving the investment earnings each year.

3. Enterprise Risk Management is Customized

A traditional insurance company can’t offer you a plan with terms that are catered to the unique needs of your business. These businesses are too broad and couldn’t possibly meet your specific requirements and offer applicable premiums and payoutsEven if a traditional company is industry-specific, they’re still going to be spread thin. It’s not as though all organizations within your industry operate precisely the same as one another.Whereas, your captive insurance company will be wholly specialized and bespoke to manage your business’s risk. Meaning, every tiny detail involved throughout your organization can be weighed into the various terms, therefore, generating the most ideal premiums and payouts.

4. You Can Leverage Reinsurance Pricing

Standard commercial insurance companies purchase something called reinsurance.After assuming the risk of their clients, insurance companies regularly obtain their own insurance. This practice is followed to compensate for claims that these businesses might be stuck paying on behalf of its insureds.An incredibly valuable aspect of reinsurance is that its available at a wholesale price.As a captive insurance company, you have the benefit of this reinsurance wholesale market, which gets you coverage at favorable rates.Since reinsurance offers direct access, you can benefit from tremendous savings. You won’t be dealing with fees paid to agents, brokers, and the first-level insurer profit markup.The excellent prices aren’t the only benefit of reinsurance. Your company — through its captive — will have full control over its choice of reinsurance partner.

Is it Time to Start Your Own Captive Insurance Company?

Is your company amongst the 1% of organizations out there who receive more in claims than they pay in premiums? If not, you should strongly consider starting your own captive insurance company.Really, this blog has only scratched the surface with the benefits. If you want to find out more, visit our website or contact us today.