How many captive insurance companies are too many?
Is the captive insurance industry growing too fast?
Some self-proclaimed experts are wringing their hands due to the growth of the captive industry. This angst is often due to the fact that more and more growth in the captive insurance industry is among small and mid-size firms. This should come as no surprise as large firms are mostly “tapped out” for captive ownership. Well over 75% of Fortune 500 companies own one or more captive insurance companies.
The growth of captive ownership should not be a cause for angst and handwringing. Yes, the face of the captive industry is changing and will continue to change. These changes will likely come with some growing pains and states will need to be vigilant in regulating this growing industry. But, the growth of the captive industry – particularly among small and mid-sized businesses – is good for business and good for America.
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). Since the early 2000s, the “Domicile Wars” discussed in Captivating Thinking last week have made captive ownership accessible to more and more businesses.
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.
There are just over 6,000 captive insurance companies in the world, and fewer than that in the U.S. Furthermore, most are owned by large corporations. However, the U.S. economy and the labor market depend on small and mid-size companies. And this explains the title of this article, “America Needs 100,000 Captive Insurance Companies.”
Consider that 70% of all jobs in America come from businesses with 500 employees or less. That is a staggering number. 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
Clearly, a few thousand captives aren’t nearly enough to strengthen the businesses that form the backbone of the U.S. labor market. 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 is a low number, and the U.S. would be better served if 500 or 600 thousand companies owned their own insurance company.