Amid a challenging insurance market, companies are on the lookout for creative solutions to bolster their financial resilience. One strategy that continues to gain traction is the creation of captive insurance companies. Could captives align with the distinct needs of your organization? Let’s take a closer look at the ins and outs, unraveling the complexities and uncovering the advantages of captives.
Understanding Captive Insurance: Alternative Risk Management
Captive insurance companies are entities formed to finance the risks of a parent group or groups. Captive insurance is a distinctive form of alternative risk transfer, offering organizations a unique avenue to manage and finance risks. There are four primary structures for captive insurers each with their own merits, these include single-parent captives, cell captives, risk-retention groups (RRGs), and group captives.
This alternative risk transfer mechanism has become increasingly popular among major corporations, nonprofit organizations, and medium-sized businesses. Unlike traditional insurance arrangements with third-party carriers, captives empower organizations to retain a portion of their risks by creating an in-house insurance company – the captive insurer. This strategic approach gives businesses more control over risk management, offering tailored solutions that align with their needs and risk profiles.1
How Do Captive Insurers Work?
Rather than relying on third-party carriers, businesses with a diverse portfolio of risks may opt to retain some of their own risk. In such instances, organizations can form a dedicated insurance company known as a “captive insurer.” The jurisdiction where the captive is organized is termed its “domicile.”
Industries Embracing Captives: Trends and Growth
Various industries have recognized the value captives bring to risk management. The top five sectors experiencing notable growth in captive premium adoption include2:
- Financial Institutions (FI): Facing a volatile insurance market, FIs benefit from captives in coverages like crime/fidelity, general liability, medical stop loss, and professional liability.
- Communications, Media, and Technology (CMT): Evolving markets and sophisticated risk financing techniques drive CMT companies to adopt captives, especially in cyber, D&O, errors and omissions (E&O), and medical stop loss.
- Retail/Wholesale: The retail sector leverages captives to navigate an evolving risk landscape caused by technology advancements and changing customer demands.
- Automotive: Global shifts in technology, consumer demand, and environmental concerns make captives essential for covering risks in employee benefits, cargo, property, and supply chain.
- Transportation: The transportation and logistics industry benefits from captives amid globalization and digitization, focusing on excess liability, marine and cargo, property TRIA, and workers’ compensation.
Advantages of Captives: Empowering Your Risk Management Strategy
When structured appropriately, captives offer a myriad of advantages, including:
- Reduced Cost of Risk
- Cash Flow Benefits
- Coverage Unavailable Commercially
- Direct Access to Reinsurance Markets
- Enhanced Bargaining Power with Commercial Insurers
- Centralized Retained Losses
- Cash Flow Advantages on Income Taxes
Is a Captive Right for You? Key Considerations
While captives represent a powerful risk management tool, their suitability depends on various factors. Consider the following key aspects:
- Financial Stability and Loss History
- Captive Expenses vs. Premium
- Demonstrated Ability to Pay Claims
- Dedication to Captive Operation
The Importance of a Feasibility Study
Before diving into the world of captive insurance, it’s essential to conduct a thorough feasibility study. This involves digging into background information to understand the industry context, discussing financial implications, and projecting potential loss experiences.
A feasibility study acts as a compass, guiding organizations through the complexities of launching a captive insurance venture. From financial considerations to understanding qualitative factors, each step contributes to a well-rounded evaluation, empowering decision-makers with the insights needed to navigate the intricate landscape of captive insurance effectively.
Navigating the Captive Landscape with MJ
In the face of a hardening insurance market, we understand the importance of tailored risk management solutions. At MJ, we’re committed to helping you navigate challenges and stay ahead of the curve. Grounded by data and analytics, we distill crucial insights to guide you through uncertainties, explore diverse options, accomplish your business objectives, and thrive. Our focus on more than just the solutions of today; we established processes to consistently unearth new strategies to align with your distinctive organizational goals as they evolve.
Ready to learn more about captive insurance and explore its potential for your organization?
Get in touch with us today, or take the next step by downloading our Executive Guide to Captive Insurance.DOWNLOAD YOUR EXECUTIVE GUIDE TO CAPTIVE INSURANCE NOW
- “Are Captive Insurers Right for You?” com. Accessed Oct 2023. https://cms.zywave.com/content/49912?referenceGuid=ed74aa82-83f0-442f-b4e0-a33da9d4a363&fromLabel=Search%20results&internalHref=%2Fsearchresults%3Fquery%3Dcaptive%26searchType%3Dcontent%26pageIndex%3D0%26sortType%3Dmatch&defaultLanguage=en-us
- Steve, Hallo. “Captive insurance entities formed at a record pace in 2020.” propertyandcasulty360.com. Accessed October 2023. https://www.propertycasualty360.com/2021/10/07/captive-insurance-entities-formed-at-a-record-pace-in-2020