Captivating Thinking

Excessive taxes can take a heavy toll on the economic viability of a business.  This is particularly true for small and mid-size businesses which are often less prepared to manage risk, uncertainty and economic swings caused by external forces.  This was clearly the case in the 2008 downturn which shuttered many small and mid-sized businesses, wiping out the companies, the jobs they provided and their impact on the local economies and communities where they previously operated.  Many of these companies were ill prepared and lacked flexibility to respond because their businesses had been hollowed out by years of taxation

Every year or so, a self-proclaimed captive insurance industry expert will suggest that it is “bogus” for captive insurance companies to insure against terrorism.  Often, this assertion is wrapped in a geographic cloak, such as “if you are buying terrorism insurance in Kansas… beware,” as if major coastal cities are the only places terrorists would strike in the U.S.  

One of the benefits of captive insurance companies is their ability to write customizable lines of cover.  This is particularly important for non-core, non-traditional and evolving risks.  There are many risks that cannot be adequately or affordably insured by third party commercial insurance.  This may be the case because commercial insurers refuse to cover risks that are difficult to quantify and price.  It may also be the case because commercial insurers don’t have enough experience with a form of risk to provide adequate and affordable coverage.  Also, this may be the case because a risk is relatively new and rapidly evolving.  The result is that commercial insurance policies offered are often overpriced and filled with exclusions.

Risk management and purchasing business insurance policies can be a daunting task. 

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.