Joining a captive insurer is one thing. You put in the work to become a captive owner. But there is that legitimate fear: what if you’re asked to leave?
Let’s answer this question. Can you be asked to leave a captive?: You can be asked to leave a captive insurer. However, this doesn’t happen often. You would have to be incredibly negligent for a captive to reconsider you. There are more common reasons a business would leave a captive. You should be fine so long as you’re getting along with others in the sandbox and effectively managing your risk.
At ReNu Insurance Group, we’ve helped over 130 businesses become captive owners. It’s our job to understand why businesses join captives, why they might decide to exit a captive, and why they might be asked to leave.
In this article, you’ll understand why a business would leave a captive, the process of leaving, and why businesses stick with captives. That way, you can see if captives are a fit for your business and understand why you would be asked to leave (if that situation were to happen).
Why would a business leave a captive insurer?
There are plenty of reasons a business would decide to leave a captive. You can choose to leave a captive if you desire. However, you can certainly be asked to leave. Here are some reasons why businesses leave a captive insurer:
- Acquisition: This is probably the most common reason a business would leave. When we say acquisition, we mean a larger corporation bought out a smaller company. The smaller insurance company will be integrated into their existing captive.
This process is known as runoff, where a larger company clears out the claims of the acquired business and then dissolves its captive to avoid duplicating efforts. Why pay for a second captive insurer when you have everything covered with one already?
- Business Changes: When you make extensive changes to your business, staying in a particular captive might be less efficient. Different insurance solutions might be more efficient when you have an evolving business model or enter a new market.
- Financial struggles: Not every business can stay financially afloat, unfortunately. When a business is going under, no amount of insurance costs is sustainable.
Captive insurance generally results in cost savings compared to the traditional market. Even so, premiums still need to be paid. If businesses can no longer afford payments due to external factors like lawsuits or supply chain issues, they might be asked to leave their captive. That or your policy will be canceled.
- Poor Performance and Risk Management: When you enter a captive, you’re expected to manage your safety and risk management effectively. You might be asked to leave if you get careless and generate high-frequency or severity losses without any plan to improve how you manage risk.
You need to play nice in the sandbox when part of a captive. Group captives rely on the collective risk management efforts of all members. You can’t expect everyone to bail you out of trouble if you kick sand in their face. - Legal and Ethical Violations: Illegal activities or unethical behavior can lead to your business being expelled from a captive. Regulatory bodies and captive managers prioritize ensuring every member complies with legal and ethical standards.
To summarize, you can be asked to leave a captive. However, it’s more likely you would willingly leave.
What happens when you leave a captive insurer?
See, leaving a captive is easy. It’s as simple as making a phone call and wanting to terminate your coverage. However, you don’t get back the capital and investment you put in immediately. Here are the steps involved when it comes to leaving a captive insurer.
- Termination: As already mentioned, you contact or call the captive manager that you want to leave. Like canceling a traditional insurance policy, you will need to sign termination documents.
- Collateral: The funds you invested will remain until after all policy years are closed. Collateral–the line of credit or cash used to secure funding for the payment of claims–is one of those investments. You might have unknown claims that will need to be paid. Getting collateral back typically takes five to seven years.
- Policies are Cancelled: The captive's third-party administrator will manage any claims incurred during the policy term until they are closed.
Watch our video that answers the question, “Can I get out of a captive?” That way, you can understand potential exit strategies.
Why do most businesses stay with a captive insurer?
Businesses join and stay with captives because of the stability and cost savings they provide. They allow businesses to avoid the ups and downs of the traditional market. Businesses also have full transparency over where every cent of their premium goes.
When businesses focus on risk management to have a stable claims experience, they can significantly benefit from being part of a captive.
Should you join a captive?
Businesses have seen plenty of advantages when sticking with a captive insurer.
- Cost Savings: When focusing on safety and risk management, you can experience insurance premium reductions over time. Since you’re essentially self-insuring, the profit margin traditional insurers add to their premium is eliminated. So, focusing on your risk to minimize claims can save you more money over time.
- Control and Transparency: You have more control over your insurance programs and know where every cent of your premium goes. You see how your money is being used, and it directly impacts reducing costs when you have effective risk management.
- Stability: The traditional market tends to have price fluctuations for most businesses. While captives don’t work for everybody, some prefer the traditional market with flat rates. Captives can help you avoid your premium rates rising yearly during renewal season. Whether you’re in a single-parent or a group captive with like-minded businesses, captives create a more predictable and stable insurance environment.
- Profitability: When you’ve been good at minimizing claims, you earn the underwriting profit. Underwriting profit incentivizes effective management of risk and a good claims history.
Note: Businesses in a captive will still experience a bad claims year once every five or six years, meaning there’s no underwriting profit that year. Either way, keeping your workplace safer and minimizing claims benefits you in the long run.
How do I join a captive?
Yes, you might be asked to leave a captive insurer. That said, that would be if you’re negligent of your risk and decide you don’t want to “play nice in the sandbox.” Sometimes, leaving a captive is necessary, depending on the circumstances of your business. Understanding why you might be asked to leave a captive and the process involved can help you better know your business’s insurance needs.
Next, read our article Is Captive Insurance Right For My Business? That way, you can determine if captives are right for your business, what types of captives there are, and how to determine if captives are suitable for you.
If you have any questions about captive insurers, contact ReNu Insurance Group to talk to one of our insurance advisors.
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