If you’re a CFO or Risk Manager and you’re reading this, it means you’re probably interested in purchasing less insurance for your company.
In fact, I don’t often meet too many people highly interested in purchasing more insurance and certainly not someone interested in spending more money on insurance.
That’s understandable, and as we enter a period where the insurance marketplace is hardening, many are being forced to spend more money on insurance. Rates continue to go up across various industries and lines of coverage, and insurer capacity and appetite is changing.
That’s why some companies are looking at captives.
WHAT’S A CAPTIVE?
A captive is an insurance company that is owned by you, the insured. There are different captive types.
Companies in the middle market space (let’s say $250,000-$1,000,000 in premium) will look at what’s called a group captive. In that arrangement, the insurance company that is formed by the captive is owned by its members – your company as well as other companies like yours. It’s a risk-sharing group. Companies much larger can look at forming their own insurance company in a “single cell” captive.
In a market like this, the advantage of a captive is not being subjected to changes in the insurance marketplace. If your company has had favorable loss history (low claims) and has a strong risk management program, a captive is a viable option. In a market where clean risks could see rate increases, this means you could stabilize insurance costs and even be able to recoup some of the premium you pay.
HOW IT WORKS
The transaction of insuring your risks through a captive work very similar to the traditional market. The company still pays a premium into the captive and an insurance policy is still issued. A third-party captive manager will be in place to help run the program and an independent actuary calculates the premium.
If your company continues to see favorable loss history in the coming years through the captive, instead of allowing surplus underwriting profits to go to an insurance company, the money can come back to you.
In a market like this, it should be a legitimate option to consider when trying to stabilize premium costs.
SOME ADDITIONAL THOUGHTS
- Stabilize premium fluctuations over time
- Allow a company to recoup underwriting profits
- Improve cash flow
- Increase bargaining power with commercial insurers
- Provide income tax benefits – premiums paid to a captive insurer may be tax-deductible, depending on how the captive is structured
Companies should consider:
- If their loss history and risk management programs would allow them to bet on themselves financially
- If they’re willing to invest more into risk management with their broker partner or internally
- Have the capital to invest into the captive initially (can be tens of thousands of dollars in a group captive setting)
For more information about captives, please contact a Marsh McLennan Agency (MMA) advisor.