Business Insurance recently reported that total insured losses for recent storms and earthquakes will likely surpass $100 Billion and could be as high as $165 Billion. The good news is that insurers and re-insurers “can absorb storm and quake losses.” However, third quarter losses will put a significant dent in capital reserves, leading many to speculate the insurance costs will rise in 2018. While solvency risk is low, insurers and re-insurers will be expected to want to rebuild their reserves.
If insurance premiums do, in fact, rise in 2018, it may be an ideal time for businesses to consider captive insurance to help control costs. Captive insurance is a choice to “own your own insurance company,” and captive ownership provides businesses with increased flexibility.
Captives often pool risk with other business (either in a group captive or reinsurance pool). It’s likely that group or pool members have not been impacted by recent storms and earthquakes, so upward pricing pressure may be side-stepped. Also, captives may re-insure a portion of their risk to commercial re-insurers. These costs may rise due to 2017 losses, but the business need not bear the full brunt of premium increases caused by a nasty 2017. Commercial re-insurance costs may rise (a portion of the business’ total insurance cost) but the premiums paid by the business to its captive may be flat or even go down if the business has had a good loss history.
Finally, since the business or business owner(s) own the captive, all underwriting profits of the company belong to the business or business owner(s). With a good loss history and solid investment strategy, captives can build up significant capital over time.