No matter how extensive insurance coverage might be, there will always be an element of risk, even with insurance in place.
Before an insurance policy can be set up, the insurer conducts an underwriting process where they evaluate the party to be insured. This enables both parties to understand the risk that the insurer will assume. A traditional insurance provider then assumes the evaluated risk for a fee, based more on general criteria for the type of business to be insured than on the specific risks or claims history for that business. In contrast, captive underwriting leads to a policy tailored to the insured company's unique needs and history, and the fee is paid to the captive (a subsidiary of the insured company).
At ReNu Insurance Group, a cornerstone of our business is helping companies determine whether owning a captive… that is, owning their insurance coverage and the associated profits—and also owning the risk associated with their business—is the best choice for them. In this article, we explain how the captive underwriting process works. Once you have finished this reading, you will be well prepared to consider whether and how to prepare your business for that process.
What is the captive underwriting process?
When underwriting a potential new captive owner, the captive risk committee (that is, the owners of the existing group captive and the captive expert) takes a careful look at how serious the business is about risk management and loss control to determine whether they can be expected to be a profitable captive owner. To do this, they focus on four key questions:
- Has the business’s past claim history been based solely on luck, or can it be attributed to policies and procedures that are strong enough for the business to become the owner of its own insurance company?
- Will the business stop at one-time implementation, or will it also monitor and adjust to an ever-changing risk landscape?
- Has the business established a long-term risk-management plan—that is, is there reason to believe that the business will be responsible and consistent when it comes to risk over time?
- Can the business be expected to be a profitable insurance company owner?
What will they look for regarding my insurance history?
To determine whether a business’s insurance history has been the product of luck or genuinely effective risk management, the captive risk committee will want comprehensive answers to the following questions:
- Have the risks been properly identified?
- Is there a comprehensive plan in place to manage and minimize risk?
- Has a process been established to identify changes in risk and to adjust accordingly?
Beyond determining whether to transition to captive insurance ownership, the answers to these questions ultimately have the potential to transform how the business owner does business.
Owning insurance—or even considering the option of doing so—changes how a business owner looks at risk. The profits associated with captive insurance ownership come from a long-term strategy that improves the business’s risk profile, so the business suddenly begins asking two key questions on a routine basis: “How do we get better?” and “How do we get safer?
How does my long-term risk management plan reflect my profitability as a captive owner?
With captive ownership, profitability comes when a business consistently, safely, and successfully manages risk. Determining whether a business is ready to succeed in the captive underwriting process requires careful consideration of how they manage risk now and how they might be expected to do so over the long term.
The captive risk committee will, therefore, want to confirm that the business owner:
- Has a deep understanding of their risk portfolio;
- Continuously stays on top of any changes to their risk; and
- Has established, maintains, and continuously improves a clear and effective long-term strategy for risk management.
What steps do I need to take to get ready for this?
An important step towards being as sure as possible that captive insurance ownership is the best fit for your business is to take a long, hard look at the questions that will come up in the captive underwriting process.
This basically means conducting a risk audit—that is, taking a deep and careful look at the risks associated with your business, your claims history, and your approach to managing risk. The audit results will provide a vital piece in your overall view of whether you are ready to take the risk of owning your own insurance company.
One of the most important things to do to ensure that your business passes the captive underwriting “test” with flying colors is to be prepared, and the steps for doing that are addressed in:
Our insurance specialists are available to discuss any questions you might have.
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