Flexibility for Business Owners and CFOs – 4 Powerful Financial Case Studies
There are many compelling reasons for businesses to own their own insurance company. We recently attended a session called “Captive 102” at the Captive Insurance Companies Association (CICA) Conference that presented four unique business challenges. In each case, business owners and CFOs overcame their challenges by choosing to own their own insurance company – specifically, a captive insurance company. While the primary purpose of captives is to insure risk, they also serve as powerful financial vehicles that provide flexibility, favorable tax treatment and numerous additional advantages to the parent company or its owners directly.
Captive 102 Case Studies
#1 – A powerful financial vehicle that supports the parent company beyond simply providing insurance coverage
#2 – A vehicle that provides flexibility to manage rising insurance costs (often unjustified increases)
#3 – A solution when a business or organization is uninsurable or can’t acquire affordable insurance
#4 – A solution when a business has addressed a major source of loss / risk but continues to be penalized with higher insurance rates based on past claims history
CICA Conference
CIC Services, LLC recently attended the Captive Insurance Companies Association (CICA) Conference in Palm Springs, California as part of our on-going efforts to stay abreast of shifting trends, strategies and regulations in the captive insurance industry. The conference was thematically focused on the future of the captive insurance industry. We attended multiple presentations and workshops covering a wide range of topics, including demographic trends, risk management, medical malpractice, preparing witnesses in a lawsuit, reinsurance, captive investments, regulatory trends, and the creative employment of captive insurance companies.
Captive 102 Case Studies
#1 – A powerful financial vehicle that supports the parent company beyond simply providing insurance coverage
Case Study #1 focused on a trucking company in Texas that hauls mail for the U.S. Post Office. This company had an excellent safety record and few losses as its drivers were well trained and had defined routes. The parent company owned 14 affiliates, and all affiliates had contracts with the U.S. Post Office.
The parent company established a captive insurance company and wrote insurance policies for all fourteen affiliates. Rather than replace third party, commercial insurance, the business chose to increase its deductibles for both worker’s comp and auto liability. As tax advantaged reserves in the captive insurance company grew, the company was able to increase third party insurance deductibles more and more, thereby lowering third party insurance costs.
Not only was the business been able to lower its third party, commercial insurance costs over time, but the business also took advantage of its captive as a financial vehicle. The business was able to start a leasing company inside its captive insurance company, because the captive had accumulated such tremendous reserves. The captive insurance company now owns all trucks and equipment and rents them to the parent company.
#2 – A vehicle that provides flexibility to manage rising insurance costs (often perceived unjustified increases)
Case Study #2 presented a restaurant chain with multiple locations, good risk control and low claims. Nevertheless, the chain was notified that its rate had been too low. The owners were now facing a 30% increase in their property & casualty coverage. They decided to do a comprehensive risk assessment of their business and developed a five year plan. The plan included establishing a captive insurance company to insure some of the risks of the restaurant chain. Because a captive is a licensed insurance company, the business now gained access to the reinsurance market. As a result, the business was able to keep total insurance costs flat. As an additional benefit, the CFO was able to build up a “war chest” of reserves in the captive during years with few or no claims.
#3 – A solution when a business or organization is uninsurable or can’t acquire affordable insurance
Case Study #3 presented a group captive formed by Evangelical Christian Organizations for youth organizations and day camps. In the wake of sexual abuse cases against the Catholic Church, it became virtually impossible for these organizations to acquire commercial insurance coverage.
Numerous organizations came together and formed a group captive insurance company to write insurance coverage for all member organizations. As a requirement to purchase insurance from the captive, members had to agree to abide by strict controls including background checks, requirements that 2 or more adults always be present with youths and many other preventive measures designed to head off misconduct.
Over a ten year period, the captive didn’t experience a single loss. The captive built up reserves and now provides “free” coverage to all its members. The captive manager at the conference noted that, “the Christian camps and youth organizations are now essentially getting free coverage for insurance they couldn’t buy at all ten years ago.”
#4 – A solution when a business has addressed a major source of loss / risk but continues to be penalized with higher insurance rates based on past claims history
Case Study #4 focused on a healthcare client that was facing significant increases in its medical malpractice premiums. From a claims history standpoint, the group had one bad year after many good years. They were able to pinpoint almost all claims to a single physician who was summarily dismissed from the group. Even with the departure of the high risk physician, the group was facing a significant increase in medical malpractice insurance cost.
The captive manager at the conference noted that “often companies take actions to address risks or potential risks but keep getting penalized with high insurance costs. If the business really believes they have reduced their risk, a captive is often a very promising solution; particularly since the captive can purchase reinsurance coverage.”
The healthcare group chose to set up a captive insurance company to write medical malpractice coverage. The captive insured some risk and passed-on risk to the reinsurance market.
What Is A Captive Insurance Company?
A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk, and captives are generally formed to insure primarily though not exclusively the risks of one or more businesses owned by the same or related parties.
Reach out to us to discuss if a captive insurance company or additional captive is the right solution for your business.