Warranty Coverage Case Study

Background:

    The Company was founded in 1976. They are a wholesale and manufacturing company, dealing with over 1,800 violin shops, music stores and luthiers, mainly in North America. With their own brands, the Company has attained a reputation for honest value and excellence. They have 40 employees, all with one goal – to continue to provide the best service and finest products available!

    They provide to the original purchaser a warranty with every instrument to be free of defects with respect to materials or workmanship for a period of 5 years from purchase date. With sales increase, the owner’s risk had dramatically increased in recent years.

Analysis:

Risk Management Advisors recommended that the client form a captive, pay the premium to their own insurance company and purchase additional coverage from the traditional market.

The focus of the owners and investors was to (1) insulate the business from periods of higher than expected losses, (2) reserve dollars for future claims, and (3) formalize their risk management program.

Solution:

A captive insurance company is an insurance company that is established to insure the risks of its owner and affiliated companies.  When properly structured, premiums are tax deductible to the company and received tax free by the captive.  The captive serves as a more efficient method to self insure.  As the captive receives premiums every year, the increasing capital and surplus serves as an efficient pool of assets for any future losses.

The business had 8 years of detailed loss data to help analyze their exposure.  Risk Management Advisors was tasked with implementing a captive insurance company and create a warranty policy for each instrument sold by the insured. Historically, it was thought that only large companies could form a captive to provide warranties, guaranties and service contracts.  However, small and medium-sized companies can now effectively manage risk through a captive insurance company.

A captive insurance company can be a very unique and flexible tool.  It affords the owner a better way to manage their risks and protect their wealth.

Approximate Five Year Premium Savings: $4,629,000
Approximate Five Year Percentage Savings: 77%

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