Have you been hearing that captive ownership is only suitable for large companies? Captives have historically been associated with Fortune 500-sized companies, but not anymore. The landscape has evolved, and captives are now more accessible to businesses of all sizes.
At ReNu Insurance Group, we’ve built our business by bringing captive insurance to small and medium-sized businesses. As the captive insurance industry continues to evolve, we are finding even more innovative ways to bring captive to small and medium enterprises (SMEs).
After reading this article, you will clearly understand whether a business of your size is a good candidate for captive insurance.
How can a small or mid-sized business own a captive?
SMEs do not typically own “pure” captives but instead participate in group or cell captive insurance programs. This can bring significant advantages in that, by pooling risks with other businesses, the SME can achieve greater risk diversification, which can lead to more stable insurance costs over time. Generally speaking, a business that is spending more than $250,000 in worker’s compensation, general liability, and auto insurance combined is at the minimum threshold for considering captive ownership.
The captive insurance ownership options for SMEs include joining either a group captive where like-minded business owners come together to form a captive or an industry-specific group captive that focuses on addressing risks specific to a particular sector. Cell captives are another excellent option for business owners wanting more control than a group captive can offer.
How do small and medium businesses benefit from joining a group captive?
In addition to benefiting from the unique features that have been established for the group captive, as a member of a group captive, an SME can:
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Access resources and expertise that might be challenging to obtain independently;
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Gain insights from other participants;
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Share best practices;
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Collaborate on risk mitigation strategies; and
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Leverage the knowledge and experience of the captive's members, enhancing their risk management capabilities, potentially reducing losses, and improving their bottom line.
The key is finding the right captive solution for each business's unique needs and risk profile.
Does a small business still need traditional insurance coverage if it has a captive?
Yes, it's important to understand that being a part of a group captive does not replace the need for traditional insurance coverage. Captive insurance and traditional insurance should work together harmoniously to provide comprehensive risk transfer solutions for businesses of all sizes.
Captive insurance allows businesses to cover specific risks that the traditional insurance market may not adequately address. By assuming a portion of the risk directly through a captive, businesses can customize their coverage to match their unique risk profile.
This customization and direct risk assumption enables more tailored protection, cost control, and potentially greater financial benefits through favorable claims experience. Most businesses will use captives for their work comp, general liability, and auto liability policies. However, only a few businesses will have enough property exposure to add to a captive arrangement. Again, it might be more cost-effective to leave certain coverages in the traditional market.
For most businesses, the ideal approach is to have a combination of captive and traditional insurance coverage. This blended approach ensures comprehensive risk transfer by leveraging the advantages of both solutions. By working closely with insurance professionals and risk management experts, businesses can assess their specific needs, identify the risks best suited for the captive, and determine the appropriate traditional insurance coverage to complement the captive program.
What are the pros and cons of captive insurance ownership?
Captive insurance ownership is not limited to large companies; small and medium businesses can also benefit from the advantages captives offer. By joining a captive and complementing it with traditional insurance coverage, businesses can achieve comprehensive risk management and tailored protection.
However, even if it sounds like your business might be a good candidate for captive insurance, several other factors should be considered. As with any decision, understanding the pros and cons is crucial before deciding whether the rewards outweigh the risks.
Be sure to read about the pros and cons of captive for small and mid-sized businesses, available in:
Our insurance specialists are available to discuss any questions you might have.
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