What does a Captive Insurance company generally insure?
Captive insurance companies generally insure commercial property and casualty risk for business owners, however there are exceptions, Agency captives and health insurance captives. Agency captives are usually owned by the same shareholders of an insurance agency. The agency captive is formed to insure risks of others. Unlike other insurance companies where profits go to company’s bottom line. Agency captive underwriting profit remains an asset benefiting the owners. While Agency captive formation increases during hard insurance markets, which is when the number of insurers decrease and insurance rates increase. Agency captives also do well during soft markets.
Are Captives a Good Business Decision?
Captives are a good business decision when a business practices good risk management and proactively manages risk. Proactive risk management, means that the business finds ways to prevent insurance claims as well as mitigating the severity of claims.
When claims occur, the proactive business reviews what happened and revises their risk management procedures accordingly. Not all insurance claims are avoidable, however reducing the severity of the loss can be accomplished. A simple risk mitigation strategy that is now backed by state laws, contributed to stable Medical Malpractice premiums.
Consequently, captives would not usually be a good business decision for a business who consistently experience poor claims history, although there are always exceptions to this rule. For example, if a business eliminates a product or service that lead to a long history of claims, a captive could make sense. Businesses who take risk management actions which lead to a significant reduction in claims over a significant amount of time should also consider captives.
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831 (b) Captive insurance company owners typically have two choices to manage their insurance company. The first way is a “do it yourself” solution. This is where a Captive owner creates their own team to manage their captive. For most Captive owners, this task is easier said than done. While it might be tempting to use any Attorney and CPA to manage a captive, the consequences are too great. It is necessary to find professionals who are knowledgeable about Captives, not an easy task and it is possible these professionals are so busy, they have no room to add new clients. The second way to manage an insurance company is by hiring a Captive Manager.
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