Rates on your premiums are probably hitting you like a brick to a window. When higher costs inhibit your cash flow, it’s understandable for you to look for an alternative to benefit your business. Captive insurance might be the alternative for you to take.
If you’re managing risk well, it’s certainly possible. At ReNu Insurance Group, we understand the intricacies of captive and traditional markets. We’ve worked with over 130 captive clients who saw increased cash flow using captive insurance companies.
That said, we won’t sit here and lie to you, pretending captives work for everyone.
This article will explain whether a captive is a viable option for helping with your company’s cash flow. That way, you’ll be closer to figuring out if a captive is a good fit for your business.
You might be wondering if your business could prosper with a captive insurer. Take your captive assessment to see how you would do as a captive owner.
Will a captive help my business with cash flow?
When your premiums hit, it’s understandable that you would be concerned about money in and out of your accounts.
The answer you might not want to hear: It depends. Initially, you’ll spend more quarterly to join a captive insurance company.
An actuary is the one that determines your premium. An actuary is a professional that uses high-level mathematics to measure risk and uncertainty. They weigh and tie your prior loss history into the available commercial loss history.
Sometimes, you’ll see premium reductions when you enter into a Captive. Most of the time, it’s level the first year. But you also have to consider collateral, which can make the first year's cost slightly higher.
Collateral is money you put up if you decide not to pay a claim or assessment. Collateral is required to enter a group captive.
Watch our video on collateral to understand how it works with captives:
You see the cashflow magic around year two and year three, where you’ve proven yourself inside the captive if you’ve sustained a good loss history. So, no claims have increased in volume. You’ll start to see weight reductions since your losses inside the captive are being weighed.
As a result, your premiums will decrease. How much is the decrease?
It depends on your business and the rate of risk it experiences. By year three, premium costs are typically reduced by 28% based on renewal compared to a traditional market (assuming everything goes well).
Sometimes, the traditional market will increase your premiums, even if you’ve been a good business and kept your people safe through your risk management policies. They tend not to tell you why that increase happened.
In a captive, you won’t have a surprise cost increase for being good.
If you’re doing everything right to ensure your workers are safe and creating more robust risk management policies, a captive can help your cash flow.
When might my cash flow increase in a captive?
You could be spending more money than you are now to enhance your risk management program, which can affect your cash flow in the short term. You’re spending money.
You’re potentially receiving underwriting profit if your claims have been at a lower level or amount. You won't realize it immediately, but you’ll have it like a piggy bank on reserve. That way, you don’t have last-minute claims that show up that you weren’t expecting.
Ultimately, cash flow should end up being a net positive long-term in a captive since:
- Your employees are (and feel) safer;
- You’re spending less on claims;
- Less time for injured workers to be away;
- You have a full staff;
- Other than the occasional sick days or stuff outside of the workplace, of course. This refers more to employees being out due to a work-related injury.
- You’re managing your business better;
- Everyone is paying attention.
Remember: Captives are a long-term business strategy. If you’re allocating your money to the right resources and programs, you’ll eventually see better cash flow and profitability as a member of a Captive.
When might my cash flow decrease in a captive?
On the flip side, having high-frequency claims and an assessment (additional premium if the loss exceeds the premiums collected) would negatively affect your cash flow since you have to pay for them. With a traditional insurer, you write them a check, and they take the rest of that responsibility.
There is certainty as to what your exposure is with a traditional carrier, meaning your premium payment. But like with any other insurance company, your premiums inevitably go up if you’re not managing your risk well.
In the short term, with a traditional insurer, you have guaranteed costs with a known entity. However, you’ll have either an increase in premiums later or a non-renewal, meaning you have to find a new insurer who may have higher premiums.
If you have losses in your captive, you may have assessments depending on frequency and severity, which can affect cash flow.
You pay for it one way or another. How you pay for it is up to you. Regardless of whichever route you take for your insurance, doing well at managing your risk benefits you.
Captives offer transparency into how much you’re spending and saving through insurance
As the renewal approaches in a traditional insurer, insurance agents will do a pre-renewal meeting with you to look at exposure data and see what insurance companies might be interested. So you get to decide where you want to move. And a traditional insurer might increase your premium, even if you’ve been excellent at managing risk.
These are valid moves to make if you choose to go into or continue the traditional market route.
In a captive, you’re only looking at losses and risk management. The market is much less of a factor. You will know whether your renewal premiums will increase, decrease, or stay flat, depending on your losses. You’re not in a horror movie waiting for a jump scare to come in with a ridiculous premium price. You’ll know what you’re heading into.
The actuary determines your loss probability based on your history to determine your premium.
Increased cash flow in captives is a benefit. But there are disadvantages.
While captives might be excellent in managing your cash flow, they might not be the ideal fit for your business. That said, they very well could be.
Captives are not for everybody. You could end up spending more than a traditional insurer. It depends on your company’s ability to manage risk.
If you’re still figuring things out, you need to read our article on the advantages and disadvantages of captive insurance. The article will give you a big-picture view (beyond just cash flow) of both sides of the aisle.
To have an indicator of how much you would need to invest to be a captive owner and see how much you can make in underwriting profit, take our pricing calculator to get your results.
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