When it comes to financial vehicles that provide strategic impact and flexibility to a business, nothing compares with a captive insurance company. This is certainly the case at Caterpillar, where its captive insurance program has strategically and creatively supported its dealer network and its greatest profit center. Cat’s greatest profit center isn’t the sale of its behemoth earth movers and other mechanized monsters. Instead the company derives its greatest profit from the sale of its aftermarket parts. And, importantly, those aftermarket parts are largely paid for by the extended service agreements that it sells through its captive insurance program. In this manner, Cat’s captive program funds its aftermarket parts profit center, making the program remarkably strategic, creative and brilliant.
CIC Services attended the Tennessee Captive Insurance Association Conference in Nashville, TN this week to stay abreast of industry trends and the legal and regulatory environment. At the conference, Don Meyers, Senior Insurance Attorney for Caterpillar Inc. gave a presentation on the company’s captive insurance strategy and history. Caterpillar is a $56 billion company with 120,000 employees worldwide. Caterpillar formed its first captive insurance company in 1983 and has formed or acquired additional captives since then.
Caterpillar’s captive program initially supported its dealer network by underwriting most lines of insurance cover required by the dealers, including general liability, equipment & inventory, and property & casualty insurance. This provided tremendous value to its dealer network and the parent company benefited from captive profits as well. The captive program also provides cargo insurance to ship equipment around the world.
Caterpillar’s captive program is not only strategic in supporting its dealer network (a profit center), it is also strategic in supporting the purchase of aftermarket parts (the company’s largest profit center). Don noted that the real “harvest” for the business is the sale of aftermarket parts which have significantly higher margins than brand new earth movers and heavy equipment. By insuring extended warranties through its captive program, Cat is essentially able to fund the future sale of its most profitable parts. Its captive is able to receive premiums from dealers and customers and set aside “loss reserves” for the future. The loss reserves are not taxed, and Caterpillar is able to invest and grow a significant amount of money. When the company’s captive finally pays claims in support of its extended warranty program, it drives its largest profit center. Cat’s captive insurance program is alternative risk management at its finest.