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Captive insurance: a risk management tool

By Higginbotham on May 06 , 2020

captive

Insurance rates are rising across most lines of business. This means that your company’s insurance rates may be going up – even if your claims are low. Or, you may find that there are exclusions in your commercial insurance coverage that are important to have covered. You may also see that deductibles are increasing while your premiums are also increasing. If you’re finding yourself in this situation, you may be looking for a new strategy that will help you keep your insurance costs contained and improve your overall risk management program. That strategy might be captive insurance. 

How does captive insurance work? 

A “captive” insurance company can mean several different things. But the common theme is the ability to self-insure certain risks that you have in your business operation, with the help of a reinsurance arrangement in the event of a large loss. This is an insurance company that you, or perhaps a group of similarly situated business owners, own to insure certain risks. A captive arrangement then allows you to capture the underwriting profit by successfully managing the risk exposure in your business. 

In the traditional insurance market, companies with poor loss ratios can drive rates up for everyone in the insurer’s risk pool. With a captive arrangement, participating companies are carefully chosen because they are serious about risk mitigation 

Why is now a great time to consider captive insurance? 

The insurance market has been hardening. This means that rates are rising, deductibles are increasing and insurance companies may start using stricter underwriting requirements. As a result, companies may have an increasingly difficult time getting the high limits and low premiums they want.  

All of this was prior to COVID-19. The current pandemic may lead to rising losses and, as a result, rising insurance rates for many lines of insurance. Another realization that has come from the current situation is a better understanding of the limitations and exclusions of Business Interruption coverage in the commercial market. These limitations and exclusions are a good example of how a captive insurance program can be used to better manage the exposure of your operating business.   

As rates rise, even companies that manage to keep losses low may not be able to escape the price hikes. Captive insurance provides an alternative way for these risk conscious companies to get the affordable coverage they need.  

What should a company consider before embracing captive insurance? 

Captives can be a great way for companies to take control of their risks and reap the profits of good risk management. But they are complex transactions and must be done properly, and they do not work for everyone. If you and your business operations: 

  • Have gross revenue of $10 million annually or are a medical professional/practice with gross revenue of $4 million annually

  • Have concerns about risks that might be excluded in your current commercial coverage 

  • Are experiencing increases in premium, despite good loss history 

  • Have concerns for how to mitigate large deductibles on commercial coverage

  • Worry about certain risks in your business for which there is no efficient commercial market to obtain coverage

Then captive insurance might be a good fit. For a better understanding of captive insurance, Higginbotham is ready to provide you with proper analysis, explanation and answers to your questions. If you are interested in seeing how a captive could help you, speak to your Higginbotham representative or contact our specialist Chad Spitzer at cspitzer@higginbotham.net.  

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Tags: Risk Management, Business Insurance

  
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