America Needs 100,000 Captive Insurance Companies – Part 2

Last week, I wrote that America needs at least 100,000 captive insurance companies.  Small and mid-size businesses that own their own insurance companies are better prepared for risk and uncertainty.  The loss reserves they can potentially accumulate in their captive insurance company can easily be the difference between thriving, surviving or dying.

After reading a recent report from the Brookings Institute, I’m not even sure 100,000 captives are enough.  Consider the graph (Brooking: Declining Business Dynamism in the U.S.; May 2014) which plots business closures and business starts.  Note that until the mid-2000’s, business closures were typically between 300,000 and 400,000 per year.  However, since the mid-2000’s, business failures climbed well above 400,000 and have remained above that mark.  This is clearly bad news for business, bad news for the labor market and bad news for America.

What do captive insurance companies have to do with the labor market?

Remember that 70% of all jobs in America come from businesses with 500 employees or less.    And, fewer than 1,000 companies employ 10,000 or more people.  While there are 26 to 27 million formalized companies or business entities, only about six million create one or more jobs.  Of those, two million companies are arguably in the job creation business.  The approximately two million companies that carry the lion’s share for job creation break down as follows:

Approximately 1 million companies employ 5-10 people

Approximately 500,000 companies employ 10-20 people

Approximately 500,000 companies employ 20-100 people

Approximately 80,000 companies employ 100-500 people

Approximately 18,000 companies employ 500-10,000 people

There are approximately 600,000 companies with twenty or more employees.  If 100,000 of them owned a captive insurance company, only sixteen percent of the market would be penetrated.  Perhaps 100,000 captives aren’t nearly enough.  The U.S. would be better served if 500 or 600 thousand companies owned their own insurance company.  As illustrated by the graph above, too many businesses were unprepared for uncertainty in the mid-2000s.  Many of those companies were wiped out and the jobs they created were lost.

How many captive insurance companies are there?

There are just over 6,000 captive insurance companies in the world, and fewer than that in the U.S….approximately 4,000.  Furthermore, most are owned by large corporations.  However, the U.S. economy and the labor market depend on small and mid-size companies.

Is captive insurance company ownership possible for small and mid-size businesses?

Yes.  It’s worth noting that Congress intended for the small and mid-size captive space to grow when they created the 831(b) tax election in the mid-80s.  This bi-partisan legislation was passed by a Democrat controlled Congress and signed by Republican President, Ronald Reagan.  The sad reality is that the growth of the captive industry has been too slow – far too slow.  The industry picked up some momentum in the 1990s, when Vermont Governor, Howard Dean, decided to make Vermont a captive hub.  Vermont undercut New York costs and capital requirements to own a captive and opened up captive ownership to most mid-sized businesses (small businesses were still largely left out and unable to enjoy the risk management benefits of captive ownership).

Why are captive insurance companies good for businesses and good for America?

Captive ownership is very good for small and mid-size businesses because it better prepares businesses to manage risk – and manage risk with a much more holistic approach.  Captives can also help businesses better weather uncertainty and threats.  Simply put, captives can help small businesses survive.  Also, small and mid-size businesses are often hollowed out by taxation, leaving them unprepared to weather calamity or market downturns.  A business with a captive in place, on the other hand, is better prepared to manage a wide range of risks and should have accumulated loss reserves to give the business buoyancy in difficult times.