Look, we get it. When looking at captives, you’re considering taking more risk since you’re tired of the frustrations the traditional market offers you. When you’re taking on more risk, there are more comments and concerns you naturally have. And when you’re taking on more risk, you don’t want to be concerned about whether or not your business can be at risk.
If you’re here and wondering if your business is at risk when becoming a captive owner, here’s the short answer: No. At least, it’s very unlikely.
At ReNu Insurance Group, we’ve worked with more than our fair share of businesses that have become successful captive owners. We understand the intricacies of captives and the preventative measures they use to prevent businesses from going bankrupt due to claims.
After reading this article, you’ll understand why your business is less than likely to face bankruptcy and the preventative measures captives use to alleviate financial strain. That way, you can feel better and more assured about your choice to become a captive owner.
First, let’s examine the purpose of captive insurers and how they’re made so you don’t risk your entire business.
Captive insurance is about risk and reward
A captive insurance company is wholly owned and controlled by its insured or insureds. Captives offer more control over insurance costs, improved cash flow, and coverage to accommodate risks. While these benefits are great, they also come with responsibilities and risks that need to be managed.
You might be wondering if your business is ideal for captive insurance. Take this assessment before continuing to see if captives would be a rewarding venture for your business.
Financial stability and claims management
Captives offer transparency and control. Unlike the traditional insurance market, you know where every cent of your premium is going and have a clear view of how your premium is being used.
Can claims in a captive bankrupt my business?
Again, the short answer is: No! Or at least it’s incredibly unlikely.
For the longer answer, here are some factors for you to consider:
- Cash Flow: Businesses with poor cash flow or weak balance sheets may struggle in a captive, especially after a bad claims year. In a group captive scenario, you may be required to pay the maximum possible premium, which equates to an additional 45% of your current annual premium.
Note: Businesses in captives will experience a loss in claims once every five to six years, which means there’s no underwriting profit that year. - Claims Frequency: Risk-sharing frequency claims are the cardinal sin of the captive world. It means you aren’t managing your risk as a business owner. Poor management of frequent claims can lead to financial strain, resulting in additional assessments or even non-renewal from the captive.
- Severity of claims: Severe or catastrophic claims are shared among a group captive. While risk is spread, meaning multiple members can face severe or catastrophic claims simultaneously. In a single-parent captive, you’re on your own, more or less.
Note: Captives purchase aggregate excess insurance to cover these scenarios, providing a safety net if everything goes wrong. - Risk Management: Effective risk management is crucial to being a successful captive owner. Captive ownership is all about effectively managing safety and risk so you don’t face claims in the first place.
Of course, if you want to be a captive owner, captive managers want to know that you’re more than just lucky. So, no one gambles on your business, let alone you.
Preventing financial strain in a captive
One of the reasons it’s incredibly rare for captives to bankrupt a business is because of the mechanisms to prevent financial strain. Captive insurers are like Batman, creating contingency plans for the worst-case scenarios. Thankfully, the world isn’t at risk. And captives won’t put your business at risk, either.
- Aggregate Excess Insurance: This activates when a captive’s retention limit is exceeded due to severe claims.
Let’s pretend there’s a worst-case scenario: Everyone in your group captive has a year where they simultaneously face severe claims and go over the captive’s retention limit. With aggregate excess insurance, this ensures the captive remains financially stable. - Risk sharing (in a group captive): Risk sharing among members in a group captive helps mitigate financial burdens. If a member cannot cover a large claim, the loss is spread to captive members proportionately.
- Assessments: If claims exceed the expected amounts, captives may assess additional funds from members. These assessments are usually spread over several years to prevent financial hardship.
- Collateral: When becoming a captive owner, you need to pay collateral, which acts as a security deposit. Collateral protects the captive and its members from financial instability, ensuring that claims can be paid even if a member faces financial difficulties.
See if captives are right for your business
Captives provide substantial benefits and savings, though they require careful consideration and management. Actively taking on more risk, enhancing safety and risk management, having a well-structured captive, and adhering to good practices ensure that a business isn’t likely to go bankrupt while in a captive.
And your business might be perfect for a captive, especially if you take on more safety and risk management to prevent claims. Read our article Is Captive Insurance Right For My Business? for a better grasp on whether your business would be a good fit.
Not sure about the costs and benefits of captives for your business? Use our pricing calculator!
You can evaluate if captive insurance is a strategic business decision by putting in general liability, auto liability, workers’ compensation, and the average value of claims over the last five years. You’ll see the numbers for underwriting profit, collateral to get into a captive, and the maximum possible premium if you had the worst claims.
To speak with an insurance advisor about captive insurance, schedule a call with ReNu Insurance Group today!
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