‘Captive insurance company’ gains new
attention as costs of coverage keeps rising
Increasing insurance premiums over the past few years were compelling corporations to seek out and evaluate alternatives to the traditional insurance policy. The events of Sept. 11 have accelerated the discussions many companies and risk managers are having about the alternatives currently available in the marketplace. The "captive insurance company" is one such alternative that has attracted significant focus and attention.
A captive insurance company is an insurance company that a corporation establishes to insure or reinsure its exposures to loss such as workers compensation, general liability or automobile liability. While the typical captive will reinsure the worker’s compensation, general liability or automobile liability exposures, it may also reinsure other coverages such as professional liability, property and umbrella.
Depending upon the size of the organization, there are different types of captive insurance company structures. Single-parent captives exist for the sole purpose of reinsuring the risks of the shareholder. There are no other entities placing risk in the captive insurance company that are not related to the shareholder. While the owner of the single-parent captive is provided the benefit of not having to share risk with any other entities, the owner is also responsible for all of the costs associated with maintaining and operating the captive.
Group captives exist for those entities that might not be large enough to maintain a single-parent captive, or that are seeking the additional purchasing power of combining multiple companies together. The group captive program, while it may provide for lower costs of establishment, does share risk among the companies that are members. This particular alternative allows a corporation to participate in a captive program, spreading the management responsibilities and costs of the captive among multiple corporations and provides a stable insurance market. Group captives will typically only accept workers compensation, general liability and automobile liability coverages.
The rent-a-captive option provides corporations that are opposed to sharing risk with other companies and are not large enough to cost effectively establish their own single parent captive. This structure, while typically it will include a higher fixed cost, allows corporations to establish captive programs with potentially less upfront capital requirements and will typically eliminate the risk sharing component that exists within group captives.
Should you stay with your traditional insurance program, establish a single-parent captive, participate in a group captive, or rent a captive? Many companies are currently evaluating those considerations.
The answers lie in what is called a feasibility study. The feasibility study begins by focusing on the corporation, its risk profile, the objectives that the company wishes to achieve, and the historical performance of the insurance program.
First begin by thoroughly analyzing your company and the exposures that you will face in the future as well as the losses that have been incurred in the past. With detailed understanding of the historical losses and exposures to loss, you will be able to determine if there is benefit in utilizing a captive structure. Because captive programs are typically structured with significant per claim retentions, understanding your losses and exposures is critical.
When looking at the history, take a close look at whether your program was financially beneficial to your insurance carrier. What were the non-loss related costs that were paid to your insurance carrier in the past. The goal of the captive insurance company approach is to put together a program that provides the corporation with reduced or stabilized insurance costs through the unbundling of the various services provided by your insurance carrier.
In many cases corporations are able to establish a captive program that carries less overhead costs than the traditional insurance carriers. Captives can also provide added claims handling control that might not be available from a traditional carrier. If your workers compensation, general liability and automobile liability annual premiums exceed $250,000, a captive structure may be a viable alternative to your current insurance program.
The most valuable tool you have in the evaluation of a captive program is knowledge. Research and thoroughly understand your company’s exposures to loss and historical claims experience. Then apply this knowledge to the captive alternative, evaluating all possibilities for loss, including catastrophic events so that you are fully aware of what the financial responsibilities are in all scenarios. This education process will provide you with the answers you need to make the right decision at your next renewal.
Michael Curry is a consultant with the Milwaukee-based risk management and business consulting firm T.E. Brennan. His focus is in the areas of risk management, risk financing alternatives, enterprise risk, financial modeling and captive insurance feasibility.
