A captive insurance company is a company you own that insures your own business's insurance risks. The
captive may be a for profit insurance company owned by a "for profit" or a "non-profit" business. Your
captive may insure you for various types of insurance you now purchase from traditional insurance companies.
Why Should I Form a Captive Insurance Company:
- Run your captive as any other business you operate and you can gain control
over your company's insurance coverage, not to mention, earn a profit!
Your captive will make you money.
- Create a business financial asset. Your captive will have
funds and capital. It will have a balance sheet and income statement
just like any other business you own and operate.
- Gain control over your business cost of insurance and escape the
traditional insurance industry games. Your captive empowers you to reduce
losses and control risk while making you a profit.
Introspection
Starting a captive is a significant business decision. We understand that retaining
risk and funding it properly may not fit with every business model. Some businesses may wish to have
their captive take a lot of risk; others may be more conservative and some may even determine that
captives are not a business they wish to own or operate. All three business decisions are valid.
When you decide to form your captive then your mindset begins with control. Your captive is another
business that controls your cost of risk and makes you a profit. Your other businesses require
commitments of time and your talent. Your captive will too for the same reasons.
Your captive requires capital. If this is burdening your company then reconsider. Your
captive is a long term solution. It is not a quick fix or something to be entered into and abandoned each year.
You are forming an insurance company. That requires a long term view compared to buying an insurance
policy to cover your risks.
Your captive protects your business assets from loss for a profit. If you have the ability to commit
the time and capital then your captive will earn money and reduce your cost of risk while creating
a new financial asset for you.
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Traditional insurance companies work off a 30-10 Rule. They take 10% of premium received from you and
put in their pocket as profit. They then take the next 30% and use it to cover their costs and expenses.
The remaining 60% flow to tax deferred loss reserve funds.
Insurance companies do not take risk. They apportion losses among policyholders and spread risk. For
smaller premiums, Insurers combine these funds into a bigger bag featuring a number of insureds like
you. They earn tax-deferred interest on your premium reserve funds and use the total to pay claims and
defense costs as they develop.
When the insurer finishes paying all losses, the remaining funds become ordinary income and pay income
tax. If no money remains, the insurance company deposits an IOU into the bag and seeks reimbursement from
all the policyholders as higher premium and fees at renewal. They also include another increased charge
for the projected higher losses. These apply even if you provided no losses under your individual policy.
You have no control over the premium funds you pay to the traditional insurer. You have little control
over the future premium you may have to pay. When rates increase, the best you can do is shop around your
business and hope to find a new insurer. If your premium is profitable to the traditional insurer, you
may see a reduction at renewal at the carrier's sole discretion.
You may spend significant dollars to reduce losses and succeed only in putting more money into the
insurer's pockets through reduced loss. Spending your money and time to make the insurance company
more money may not make sense. Why not reap the benefit of these savings and recoup the expense and
time spent? Why not keep the premiums and the profit and interest they generate? Your captive
enables you to keep your premiums, the interest, and the profit in the same way a traditional
insurance company does.
Seven key reasons for you to start a captive solution:
- Control: Your captive provides you control over the process of risk funding. Instead of paying
premium to an insurance company, you take control over your risk and premium funds. Your
captive insurance premium becomes an annual investment instead of a variable annual expense to an
insurance company.
- Financial Asset: Your captive becomes a financial asset that increases the total value of your
business. You incur lower frictional costs than under the traditional 30-10 Rule. You keep the 10 and
reduce the 30.
- Profit: You partner with PHI to help you manage and operate your captive as a for profit business.
- Coverage: Your captive provides you coverage every year at a cost that reflects your losses and
exposures. You gain independence from the boom and bust cyclical swings that plague the traditional
insurance industry. You and PHI may develop unique coverage for your special needs that the traditional
insurance industry is unwilling to offer.
- Claims: You may establish your desired claims philosophy. You may choose input and involvement in
the claims process at the level you prefer.
- Other Products: You will discover that your captive financial asset becomes a cash cow and you may
use it for additional purposes. You may choose to add more coverage, select another insurance product
or provide unique insurance or expense indemnification funding for other related services for additional
profit. Your funding parameters and imagination are the only limits that apply to your captive's potential
use.
- Economic Recession Offset: Your other business operations may suffer adverse results from economic
disruptions not within your span of control. Your captive provides you an additional funding source for
these times and events.
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When do you need to consider a captive insurance company?
This depends on you but there are a
few rules of thumb to consider. If you are paying more than $500,000 for any one insurance policy
or have roughly 45 covered plan member employees then you may feasibly consider the captive option.
A second consideration is the insurance line of coverage.
Workers compensation is statutory. If you are
self-insured, then establishing a captive to fund part of the self-insurance exposure is reasonable and
prudent to consider if you are paying $500,000 or more in total annual expense. If you are fully insured
then consider taking a large retention of $250,000 or more, and funding that with your captive. First
dollar premiums paid to a workers compensation insurer equal to $1,000,000 or more are normally a
reasonable and prudent minimum level to consider taking a large retention or deductible and funding
this with your captive. This benchmark may vary depending on your business goals and objectives.
Employer Owned Life Insurance (EOLI) makes sense at almost any premium threshold. It is a very beneficial
way to put your captive asset to work profitably. PHI is pioneering this for our captive owners.
Employer health plans exceeding $500,000 in employer premium contributions or roughly 45 covered plan
member employees may make sense to consider for your captive to fund. Often, you may wish to consider
self insuring the health plans and use the captive to reinsure this or you may elect to stay insured
with a large deductible or retention. PHI offers significant, proven expertise in this area other captive
managers may not duplicate.
Professional liability exposures of $500,000 or more in first dollar premium are a reasonable threshold.
Third, you also need to consider that your captive will require, roughly $300,000 or more investment to start, before
the first dollar of premium or risk is written. If you are not confident these are manageable expenses,
then you may determine this is not the time for you to consider forming your captive. $200,000 of the
roughly $300,000 is the minimum surplus amount required by the regulatory authority for your captive
and remains with you in your captive. These become funds you cannot use for other purposes. The remaining
expenses are the estimated start up cost to create and license your captive. These expenses may vary.
You need to evaluate if you are comfortable taking the risk a captive requires. Are you prepared to spend
the time your captive will need as a business for you to operate effectively? Do you really want to take
control over your cost of risk? Are you adverse to taking funded risk?
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