Retaining Risk vs. Financing Risk

Every business faces risks, from liability claims to supply chain disruptions. As a business owner, you bear responsibility for managing these risks to safeguard your valuable assets. Essentially, you have two options – retain the risk in-house through self-insurance, or transfer the risk by purchasing insurance policies. There are advantages and drawbacks to each approach.

The good news is that you can take control of your risk management strategy. By understanding innovative solutions like captive insurance, you can customize coverage, realize tax benefits, and protect your wealth. A strategic approach leads to peace of mind.

First, we’ll examine the key differences between risk retention and risk financing. Next, we’ll delve into how captive insurance provides an ideal solution for sophisticated companies to obtain robust asset protection. Finally, we’ll outline actionable next steps so you can start safeguarding your assets.

Risk retention, also known as self-insurance, is when a company retains its risks in-house instead of purchasing external insurance policies. For example, a firm may opt to set aside $100,000 annually in a reserve fund to cover potential losses rather than buy a policy with $100,000 in coverage. Risk retention provides control and cash flow advantages, but involves taking on uncapped liability.

Risk financing refers to transferring risks by purchasing insurance policies from commercial carriers or participating in a risk pool. This approach caps liability and provides peace of mind. However, costs may be higher and policies less customizable. Risk financing strategies also lack tax benefits compared to risk retention.

A captive insurance company represents an appealing middle ground between risk retention and financing. Captive insurance companies are insurer subsidiaries wholly owned by their parent company to provide coverage for their risks. Sophisticated companies enjoy customized policies, potential tax deductions, and asset protection.

When considering risk retention versus risk financing, carefully weigh your specific business needs and risk appetite. Ask yourself key questions like:

  • What risks could significantly impact your assets?
  • What level of control over your risks is important?
  • How risk averse are you? What is your comfort with uncapped liability?
  • How price-sensitive are you regarding risk management costs?
  • What are your cash flow needs and tax considerations?

Soliciting input from financial advisors, accountants, and insurance experts is highly recommended when evaluating these factors. As fiduciaries, we can provide unbiased guidance tailored to your situation.

For suitable knowledgeable companies, forming a captive insurance company allows you to optimize risk management. Work with reputable captive insurance managers to establish your captive insurance subsidiary in an advantageous domicile. Be sure to:

  • Fund the captive insurance company appropriately to cover projected risks
  • Hire experienced third-party administrators to handle underwriting, claims, and reporting
  • Develop customized insurance policies to meet your specific needs
  • Take advantage of allowable tax deductions on premiums paid to your captive insurance company
  • Communicate with regulators to maintain compliance

Here are a few examples of risks that captive insurance companies can cover:

  • Deductible reimbursement - Fill gaps in commercial policies
  • General liability - Protect against injury or property damage claims
  • Professional liability - Safeguard against errors and omissions
  • Cyber liability - Hedge against data breaches and digital threats
  • Business interruption - Replace lost income from disruptions
  • Pollution liability - Cover environmental incidents

Work closely with captive insurance and risk experts to determine the optimal policies to protect your valuable assets.

In the complex world of business risk, there are no one-size-fits-all solutions. But failing to implement adequate risk management and asset protection strategies can leave you dangerously exposed. By better understanding innovative options like captive insurance, sophisticated companies can take control and safeguard their hard-earned success. 

Can’t Beat Your Insurance Company? BECOME ONE!

Find Out How Ready Your Company Is For A Captive Insurance Plan.

Free Assessment