Insurance against risk is crucial for any business. In any insurance contract, the insurance carrier assumes all the risks, decides on the cost of the insurance based on general criteria, and keeps all the profits. The key difference with captive insurance is that the business owner assumes some of the risk associated with their unique risk profile and reaps the potential benefits of customized coverage, lower costs, underwriting profits, and investment income.
As experts in the intricacies of the captive insurance option, ReNu is ideally positioned to help you determine whether this unique insurance solution would be a good fit for your business. Whether yours is a large company or a small-to-mid-sized business, captive insurance might be the answer to getting more control over your bottom line.
This article is just the first of many we have put together to ensure you have all the information you need to start the conversation. After reading this article, you understand what makes captive insurance stand apart from the traditional insurance model.
Watch our video on what captive insurers are, the types of captives, and how the insurance model can benefit your business.
What exactly is captive insurance?
Captive insurance is a type of self-insurance where the insurer is wholly owned and controlled by its insureds.
But what does that actually mean?
Rather than paying an outside insurance carrier to take on the entire risk (and reap all the profits), the business owner keeps some of the risk along with the related profits. To do this, the business owner invests their capital and resources into the captive insurance company (the “captive”), and the captive becomes a subsidiary of their business. The captive owner can then design coverage that meets their specific requirements and aligns with their unique risk management strategies instead of relying on an outside insurer to define their insurance needs.
How does captive insurance differ from traditional insurance?
Captive insurance steps out of the traditional mold, giving businesses more control and flexibility over coverage, profits, risk management, and predictability:
- Captive owner(s) create policies that fit their risk profile. No more settling for one-size-fits-all coverage that can lead to gaps in protection;
- When a captive performs well with claims, the profits stay within the owner instead of going to external insurers—this improves costs over time and potentially boosts the bottom line of the parent company (or companies);
- Owning a captive allows the parent business(es) to implement and enforce their risk mitigation measures—this creates a safer environment, potentially reducing insurance costs along the way; and
- Where traditional insurance comes with yearly renewals and unpredictable pricing, captive insurance ownership offers stability and peace of mind—consistent coverage and pricing, which enables long-term planning without the worry of sudden changes.
What are the major types of captive insurance companies?
There are several types of captives, including pure (single-parent), association, group, and cell captives.
Pure (“single-parent”) captives
A “pure captive” insurance company, also called a “single parent,” insures only the risks of its parent and affiliated companies or controlled unaffiliated businesses. It is set up and operated by a single owner to insure its risks and the risks of its subsidiaries and affiliates. FedEx, Tesla, and General Electric are examples of companies using pure captives.
Association captives
Association captives can come in various forms. One example of this type of captive is medical malpractice captives for doctor organizations. Sometimes, associations form risk retention groups and/or risk purchasing groups. Each of these may also be set up in a captive insurance program.
Group captives
A “group captive” insures the risks of its parent company, as well as non-related businesses and affiliated persons. When multiple entities own a single captive, they are called captive “members.” Group captives are initially set up to insure the risks of the owners, which may or may not be similar. Group captives have seen the most growth over the last decade. As more small and mid-sized businesses face rising insurance premiums and have low claim frequency, business owners have sought out group captives to band together. As a member of a group captive, each business benefits from pooling resources to start and maintain the captive insurance company.
Cell captives
The term “cell captives” is derived from “rent-a-captives,” where unrelated businesses could enter the self-insurance space without the upfront cost of creating their own single-parent captive. As rent-a-captives became more successful, businesses within the arrangement discovered that the insuring entity was exposing all participants to everyone else’s liabilities. When jurisdictions became aware of the problem, legislation was introduced to close the gap. Bermuda was the first domicile to create the segregated captive model, with no attachments to other participants inside the cell facility. This allowed small and mid-sized businesses to continue or expand their use of captives. Cell captives are a fast-growing segment of the alternative risk financing sector.
Does a captive insurance owner still need traditional insurance?
Yes. Captive and traditional insurance can work together harmoniously to provide comprehensive risk management solutions for businesses of all sizes.
For most businesses, the ideal approach is to have a combination of captive and traditional insurance coverage. This blended approach ensures comprehensive risk management by leveraging the advantages of both solutions.
Traditional insurance policies, such as commercial property, protect the business from various perils and third-party claims that may not be covered under the captive program. At the same time, 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 a favorable claims experience.
While you need to have traditional insurance with a captive, check out our video that goes more in-depth about how captive and traditional policies differ:
What are the pros and cons of captive ownership?
Captive insurance is a form of self-insurance that departs from the traditional insurance model. It gives businesses more control and flexibility over their coverage, the ability to keep the related profits, and risk management that meets their unique risk profile. At the same time, the captive model is designed to work in harmony with traditional insurance to ensure comprehensive coverage of all potential risks.
A key part of understanding whether captive insurance is right for you will be to assess the specific needs of your business, identify the risks that should be covered under the captive, and determine the appropriate traditional insurance coverage to complement the captive program.
But before doing that, you must understand the whole captive picture, including both the pros and cons of captive ownership.
There is still more to understand about the captive insurance model before you make a decision. And truthfully the concept of owning your own insurance company may still feel like a foreign concept. The next step is to understand how captive insurance compares to the traditional insurance you're used to in different categories. This important consideration is addressed in:
Or if you'd prefer to talk to a real person and get some of your questions answered, we're available to discuss any questions you might have.
Topics:
