Question: How is insurance like a parachute?
Answer: If it’s not there when you need it, you probably won’t ever need it again.
This was the opening slide for the “Small Captive Claims Management” educational session at the 2017 Captive Insurance Companies Association (CICA) Conference on March 12-14 in San Diego, California. CIC Services regularly attends CICA to identify best practices, meet service providers, remain abreast of political, legal and regulatory changes and understand emerging trends in the industry.
This quote summarizes the challenges many small and mid-market businesses face. Unlike large corporations that can usually weather disaster, small and mid-market companies are often one disaster away from extinction. For example, consider that Target survived a massive cyber breach but many small businesses that experience a major cyber breach are forced out of business. Also consider that Hurricane Katrina didn’t force any of the Fortune 1,000 out of business, but the storm forced thousands of small businesses to close, even though their commercial insurance would restore their property. Business activity dried up for many. They simply didn’t have THE RIGHT parachute when they needed it most.
What is THE RIGHT parachute?
For many small and mid-market businesses THE RIGHT parachute is to implement Enterprise Risk Management (ERM) utilizing a small Captive Insurance Company (CIC). ERM identifies and assesses all threats a business faces – not just those that are commonly commercially insured. A CIC enables a business or business owner to own their own insurance company. CICs form the backbone of an ERM strategy. ERM has many goals including improved risk management, risk mitigation, cost control and implementing best practices. However, for the mid-market the primary goal of ERM is survival, making the parachute analogy particularly spot-on. What good is insurance if it’s not there when you need it?
What are some reasons that businesses may have purchased insurance, but it isn’t there when they need it?
I’ve listed four common reasons below.
- Inadequate Commercial Insurance Coverage – This occurs when a business has a loss for which it has not purchased commercial insurance (although commercial insurance may be available).
- Commercial Insurance Coverage Is Not Available or Exorbitantly Priced – Similar to #1 above, this occurs when commercial insurance is not available at all or commercial insurance is extremely expensive.
- Insurance Policy Exclusions – This occurs when a business has a loss for which it has purchased commercial insurance, but the policy has an exclusion that prevents the insurance company from paying the claim. Policy exclusions protect the insurance company to the detriment of the insured.
- Insurance Company Refuses To Pay – This occurs when a business has a loss for which it has purchased commercial insurance, but the insurance company is slow to pay or refuses to pay a claim.
Is there an insurance approach that addresses all four?
ERM with a CIC can solve all four “inadequate parachute” problems listed above. Regarding problem #1, captive insurance policies can fill gaps in insurance coverage and address exclusions in existing commercial policies. Regarding problem #2, captive insurance policies can be (and are often) written to address risks not insured by commercial carriers. Also, captive policies can insure risks that are expensive to insure because premiums paid aren’t a sunk cost. Commercial insurance is a sunk cost. In years with no claims, premiums paid are gone forever. Regarding problem #3, captive policies can be crafted with few exclusions. Quite often, commercial policies are designed to protect the insurer. Properly structured captive policies are exactly the opposite; they are tailored to protect the insured. Finally, regarding problem #4, the captive is far less likely to be hostile to the insured in the event of a claim as the CIC is owned by the insured!
Since 2005, CIC Services has helped business owners ensure they have THE RIGHT parachute – one that is there and working properly when they need it!