Risk management comes in many forms. In traditional insurance, you pay a premium to an insurance company, and that company handles your claims. It’s simple and effective – but it’s not the only model out there. Captive insurance is an alternative way to manage your exposures. Keep reading to learn more about benefits and risks – and whether it could be right for you.
What Is Captive Insurance?
A captive insurer is owned by the insureds. It can be thought of as a type of self-insurance, but it resembles a traditional insurer in many ways, with the essential difference being that it’s owned and controlled by the participating businesses (the policyholders).
Captive insurance is appealing for a number of reasons:
- You get the data you need. Because you’re controlling your own insurance, you’re also controlling the claims data. Knowledge is powerful, and you have all the knowledge you need about claims types and frequency.
- You can control your risks. Once you have claims data, you can act on it. You know which risks are hurting your business the most, so you can allocate resources to manage these risks.
- You can lower your costs. With a traditional insurance setup, you know that having a high frequency of claims will result in higher premiums, and that having fewer claims will help you lower your premiums. But with a captive, you enjoy a more direct savings opportunity, as well as the possibility for lower premiums by eliminating some of the extra costs associated with a traditional policy.
- You gain the flexibility you need. Each company is unique. With captive insurance, you can craft your coverage to exactly meet your needs. You can also address exposures that are hard to insure through traditional insurers.
What Lines Can Captives Be Used For?
The captive model can be used to meet a variety of insurance needs. Various lines of business can be insured through a captive, including:
- Group health
- Workers’ compensation
- Commercial property and auto
What Are the Risks?
When you join or form a captive, you gain more control, but you also take on more risk. If you have higher claims than projected, your business has more skin in the game. That said, costs can be controlled by establishing proper reinsurance safeguards.
Claims handling must be carried out reliably, and this requires resources and expertise, usually from a third-party administrator. Good claims administration procedures must be executed to ensure that coverage is determined and that appropriate payouts are made consistently.
Regulations can pose another hurdle. Captives must be formed with state laws in mind. Additionally, while captives can offer tax benefits through deductible premiums, the IRS has warned against micro-captive structures that engage in abusive tax avoidance behaviors, such as having deceptive policies, absent claims administration processes, and high premiums designed to secure the desired deduction.
These risks do not mean that companies should avoid captives. Rather, it’s important to be aware of the potential pitfalls so that problems can be avoided – which is always the case with risk management.
Expert Guidance Makes the Transition Easier.
The team at Heffernan Insurance Brokers has extensive captive insurance experience. We’ve helped many companies achieve great success through these types of innovative insurance models. Captives are particularly attractive for safety conscious companies that are willing to use risk data to drive better results. Interested in learning more? Ask your Heffernan Insurance broker.