Hearing the word “captive” regarding insurance companies probably doesn’t make you comfortable. You may have heard gossip about captive insurance companies, sort of like how you heard false rumors around the high school lunchroom at one time. The rumors sound convincing at some point.
Thankfully, you aren’t someone who’s going to take those rumors at face value. Informing yourself of the types of insurance companies will help you make the best decision for your small to mid-sized business.
ReNu Insurance Group has helped over 130 captive clients, many of whom have heard these misconceptions before. We’ve heard all the misconceptions that propagate about captive insurance companies. The insurance industry hasn’t done its part in telling you the truth about these misconceptions.
This article will debunk the top 3 misconceptions about captive insurance companies.
Table of contents:
- Misconception #1 - "My business is too small to join a captive insurance company"
- Misconception #2 - "I lose the protection of a traditional insurance company"
- Misconception #3 - "A huge loss can bankrupt my captive insurer"
- So, what are the actual pros and cons of captive insurance companies?
If you prefer to learn in a more visual format, you may want to watch our video on these misconceptions:
Misconception #1 -- "My Business is too small to join a captive insurance company"
Historically, since the 1950s, captives were reserved for large Fortune 500 companies. The same can't be said for the modern day.
The truth: captives insurers are more accessible than ever to small and mid-sized businesses
Since the mid-90s, small to mid-sized businesses have formed and joined group captives.
As the market has evolved, the minimum has gone as low as $250,00 for premiums.
If you’re typically spending $250,000 or more on worker’s comp, general liability, and auto liability combined, you’re big enough.
Misconception #2 -- "I lose the protection of a traditional insurance company"
Many business owners worry that when they go with a captive insurance company, they lose the same quality of insurance they once had.
The truth: your business is just as well protected with a captive insurer
While you carry more risk in a captive insurance company, your business is still protected the same as though you’re with a traditional firm.
You can buy fronting coverage or reinsurance for the big claims that a traditional insurance company is designed to take on. Most people think reinsurance is for the back end but can also be used for the front end.
The carrier will be reinsured for the first couple of layers of claims. The carrier owns the bad, catastrophic insurance claims. If you didn’t have that protection, you would be stuck paying that large seven-digit claim, which could put you out of business.
Misconception #3 -- "A huge loss can bankrupt my captive insurer"
This is one of the primary concerns we hear from business owners. This is understandable, especially when it comes to your business.
The truth: a captive insurer is prepared for worst-case scenarios
Even with Million-dollar claims, your captive insurance company isn’t likely going to file for bankruptcy. Part of your investment is to protect members from catastrophic claims and other issues. That’s why you pay a premium to a captive. The premiums you pay are allocated to your captive insurance company’s loss fund.
Remember, captive insurance companies have well-performing businesses (members) that take great care in their risk management programs. They don’t gamble on institutions that have been lucky with their safety. They make sure you meet the minimum requirements.
Yes, accidents happen that result in catastrophic claims, no matter how much you try to minimize the risk of your employees getting hurt. That said, captive insurance companies are strategic in predicting and controlling losses.
Your captive insurance company is always looking ahead and will make sure to have reinsurance. That way, catastrophic claims won't put your captive insurance company anywhere close to becoming bankrupt.
So, what are the actual pros and cons of captive insurance companies?
You’ve learned some of the common misconceptions and truths about captive insurance companies. Even with all of these debunked, you might still have questions. And that’s okay.
Captives aren’t for everyone, but they might be for you. If you’re still unsure, you need to read our article on the pros and cons of captive insurance companies.
You might also be wondering how your business would perform in a captive. Take your captive assessment to get your results.
