This is a question that I am routinely asked – “what types of businesses own their own insurance company?” A better question would be “what types of businesses would benefit by owning their own insurance company?”
Without a doubt the answer would be “more than you think and far more than are currently enjoying the benefits of owning a captive insurance company.”
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.
One of the conference sessions was titled “Captive 102.” This session presented a robust analysis of the captive industry with emphasis on 1) industry groups using captives, 2) primary reasons for operating a captive, and 3) lines of insurance coverage written by captives. Research and conclusions were based on surveys of CICA members.
This article will briefly touch on points one above. Captives are applicable to a broad range of industries. The chart above illustrates the distribution of captive insurance companies by industry group. Clearly, numerous companies in a very wide range of industries are making the choice to own one or more captive insurance companies.
Why Do Financial Institutions Make Up 18% of Captives?
It is interesting to note that the top industry group utilizing captive insurance companies in their risk management strategy is financial institutions. Is this the case because financial institutions have greater risks than other industry groups?
– Greater risk than healthcare providers?
– Greater risk than transportation / logistics providers?
– Greater risk than manufacturers?
– Greater risk than construction companies?
This is unlikely. We believe the simple answer is that as financial institutions they are keenly aware and focused on (drum roll) winning financial tools. In reality, all risk management is financial. Furthermore, captive insurance companies are powerful financial vehicles with benefits that go far beyond risk management.
What Does This Mean?
Simply put, many businesses and business owners (particularly those in non-financial industries) are missing out by not owning their own insurance company.
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.
How Does a Captive Insurance Company Work?
A captive primarily insures its parent company or related companies. Hence, the parent company is able to purchase insurance from its captive, and it can insure risks that third party insurers will not insure or risks where third party insurance cost is unaffordable.
Some examples include (but are not limited to):
– Loss of a key account
– Loss of key personnel
– Loss of a license or certification
– Loss of a sales or distribution territory
– Loss of dealership rights
Premiums are paid from the parent company to the captive with pre-tax dollars. The captive can invest its assets mostly as its owners choose (some domiciles have restrictions).
Call us to discuss whether or not a captive insurance company or additional captive insurance company is the right move for your business.