In a recent post on the Risk Matters blog, I gave an overview of captive insurance – insurance companies that are owned and controlled by insureds to insure the risks of its owners who, in return, benefit from the captive insurer’s underwriting profits. It’s an option that is increasingly being pursued by businesses seeking greater control over claims handling, professional partners, stabilization and reduction of the cost of risk, and, ultimately, a return on underwriting profits and investment income.
If you’re unsure if a captive insurance company is right for your business, ask yourself the seven questions in my last blog post. If you answered “yes” to a majority of them, it may be worth your organization’s time to explore this insurance option.
Captive insurance companies can take a number of different forms. However, the most common types are single-parent captives and group captives.
A single-parent captive, also known as a pure captive, is owned and controlled by one organization and formed as a subsidiary of that organization. The captive insures the organization or its other subsidiaries. Single-parent captives have the greatest flexibility, but also have high formation costs. This captive is typically only utilized by large, financially secure organizations that have a desire to gain total control over their insurance program while reaping the benefits of investment income on premiums paid into their own insurance company. Single-parent owners normally have several million dollars in premiums committed and ideally have seven or more subsidiary companies in the program.
A group captive, also known as a sponsored captive, is an insurance company owned and controlled by unrelated organizations. It is a group of companies banded together with a desire to control their own insurance destiny through an alternative to traditional insurance.
Group captive owners will have premiums of $400,000 to $1,500,000. Beyond this range, other loss- sensitive alternatives are often more cost-effective. Member companies are usually entrepreneurial in nature with good loss histories and a strong safety culture. Coverage provided by group captives normally includes workers’ compensation, commercial general liability, and automobile liability/physical damage.
Captives are one of many ways insureds can insure or self-insure risk. Choosing the right risk-financing alternative is important. However, the performance of any program is far more dependent on safety, contractual risk transfer, and claims management than it is on the insurance structure. When evaluating captive alternatives, equal attention should be given to these areas and whether the captive program and team of service providers will positively impact these areas of your business.
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