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Captive Insurance: Turning Risk to Profit

By Stephen Paulin

All companies have risk. Successful businesses control their risk and make it work for them.

Captive Insurance Companies and other Alternative Risk Transfer techniques enable entrepreneurs to reduce their Total Cost of Risk, by focusing your risk management activities, protecting your assets, allowing for the generation of additional profits while reducing taxes.

This special purpose entity can be a partial self-funding mechanism created and wholly owned by the operating entity to insure the risks of its owner. A captive is a valuable tool for managing business risks in a formal, measured, tax-efficient manner. This is a long-term strategy that facilitates cost-effective and efficient risk financing and has the potential to provide benefits amounting to millions of dollars.

Originally the purview of Fortune 500 companies, the past 60 years have seen captives evolve to become a key risk management component of privately held businesses. Today, there are over 7,000 captives globally, generating excess of $65 billion in annual premium. For the past 10 years, year over year captive growth has been between 5% – 10%, with mid-market showing the most growth during the past 5 years. Further, these formations are occurring domestically in states, such as Vermont, Utah, Nevada, Montana and Hawaii.

Captives are formed to cover a wide range of risks, including Workers’ Compensation, General Liability, Automobile, Construction Defect, Business Interruption (without exclusions for virus / communicable disease), Product Recall and Warranty to name a few.

Given the environment of increasing property and casualty rates (hard market) coupled with COVID challenges, businesses with strong balance sheets are looking for options to control their own destiny, rather than exposing their business to the up and down cycles of the insurance industry. Other notable benefits include:

  • The ability to price risk in line with a company’s own performance, eliminating the impact of losses from others as well as the cost of capital attached without using an insurer to place the risk.
  • Tailor the insurance program to meet an organization’s needs and emerging risks. This resolves the impact of limitations of coverage by the commercial insurance market. This is relevant surrounding the topic of cyber risk, where a client can cover exactly what they need for the organization.
  • Being in control of the risk and insurance program also leads to other significant benefits such as control of claims management, better data to improve risk management within the organization, and pricing certainty from which to build future budgets. Effectively, a captive can become a central component of the enterprise risk management program of a business.
  • As an insurance company, the captive also gains direct access to the reinsurance market. A captive can set their risk appetite and any risk that exceeds this level generally can be reinsured, at a better rate than the commercial insurance market.
  • Profits generated are held within the captive and not given to the insurer, as is the case with traditional commercial insurance; additionally, Captive results continue to out-perform the traditional market.

A broker’s primary function is assessing risk and protecting assets. This is essential, and should be a core competency of brokers. However, in and of itself, this is not a point of differentiation or compelling value proposition. By stepping outside of this core competency, brokers with captive expertise help organizations by moving beyond protecting the balance sheet to increasing business performance, not just better insurance outcomes.

We strongly believe these benefits create a compelling reason to investigate whether a captive insurance company is a good fit for your organization and Orion has the expertise and experience to help you with this process