Captive insurance was once considered a risk funding mechanism available only to very large organizations. The steady advance of the concept and the virtual avalanche of interest in recent years have certainly altered that perception. While small to mid-sized organizations are unlikely to create a captive on their own, there are numerous captive arrangements available in which they can participate.
Some of these are structured such that, from the insured’s standpoint, participating in the captive is not much different from purchasing “traditional” insurance. Given the diversity of the arrangements available, defining captives can be a bit cumbersome. A good compilation of definitions is, a captive insurance company can be defined as a special purpose insurer whose sources of business are (1) its shareholders and their affiliates, which put their own capital at risk, or (2) other participants such as association or group members. A captive insurance company:
- provides a stable, long-term financing mechanism for selected risks;
- allows owners and sometimes even participants to take part in the insurer’s operations, claims administration, and underwriting decisions;
- develops and implements tailored risk management services for owners and participants;
- encourages and provides incentives for good safety and loss control practices; and
- Creates an opportunity for owners and participants to reduce expenses over time.We have relationships worldwide that provide our customers with real feasibility studies to determine the viability of there participation or investment. Take Caution! Some less scrupulous insurance agents sell these vehicles a way to pay fewer premiums. Our experience shows us that if an organization is not prepared to either pay a large assessment for any reason or be able to stomach a 100% increase in rate, and be able to do so for at least ten years, they should stay away.
- Special NOTE to those considering this strategy:The main reasons organizations turn to captive insurance continue to be the same today as they were in the past—excessive pricing, limited capacity, risks that are uninsurable in the “traditional” insurance market, or the desire for a more cost efficient risk financing mechanism. When the products offered by insurers do not meet the needs of insureds due to any of these reasons, the best option might be to form a captive. Other reasons for utilizing captive insurance include the following.
- Broader coverage
- Stability in pricing and availability
- Improved cash flow
- Increased control over the program