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Frequently Asked Questions About Captive Insurance

We might as well admit it up front. There are some questions the asking of which won’t exactly make you the center of attention at the next cocktail party. They don’t lend themselves easily to halftime conversation while watching a football game with friends or work associates. Nor is knowing the answers likely to substantially widen your circle of influence on your favorite social media platform.

But having at least a framework of answers about the basics of captive insurance could help you think a bit more strategically about how your company manages risk. They may even shift your thinking from a reactive stance driven primarily by increasing costs of insurance to a more long-term approach driven by the specific coverage needs of your company.

Captive insurance and its many benefits aren’t a fit for everybody. But the candid answers to the following oft-asked questions may help you determine if it could be a fit for you.

What is a captive insurance company?

A captive insurance company is an insurer formed to provide insurance coverages for subsidiaries and/or entities owned by its parent company.

How can a captive insurance company help me?

It might not. Whether or not a captive is a viable solution requires a detailed understanding of what you and your company might be seeking to achieve. Even if a captive is able to help you, it requires a certain mindset that not everyone possesses.

If you are seeking a long-term approach to stabilizing insurance costs, controlling your own insurance destiny, self-insuring risks in a way that is more financially sound than at present, and potentially receiving some profit in the process, a captive can certainly help you achieve all of these things.

How can I tell if I’m the right fit for captive insurance?

First things first. In order to contemplate a captive solution for insurance needs, a company must be able to demonstrate financial soundness. This prerequisite is due simply to the capital investment required, whether to form a captive or join an existing group captive.

What is meant by having a captive mindset?

Let’s start with what it doesn’t mean. A company must not view a captive as an immediate cost-saving tool. Captive insurance is a long-term investment designed to control insurance costs over time. Retaining that control is of primary importance. If the captive performs well, it can also provide the opportunity to reduce coverage costs. We must, however, emphasize that this takes time.

What else is required from management?

A corporate commitment to sound risk management must be top of mind. This mentality to risk management must be top down and pervasive. In other words, a focus on safety and effective loss control efforts, led by ownership. In the event these prerequisites are satisfied, it’s okay to start thinking about the particulars.

Should I form a single parent captive or join a group captive?

Not to be coy, it all depends. There are many different factors to consider when comparing the pros and cons of a group captive versus a single parent captive.

Group captives offer similar benefits to single parent captives, but not at the same scale. A group captive provides insulation from cyclical traditional market rates, but your rates and performance will be dictated by the overall performance of the group. With a single-parent captive, you’re on your own. The performance of your captive is based solely on how the parent controlled insured(s) performs.

It is important to remember that while the performance of the group could negatively impact your potential return, it could also help. Everyone has that “bad things happen to good people” type of year. When this happens, the group can step in to assist in offsetting some of those losses.

What else should inform my choice between single and group captive?

Remember the objective of greater control? A single-parent captive offers the parent more control when it comes to how the captive is managed, from the choice of a TPA and other service providers to the domicile in which the captive will be licensed. When you join a group program, these essentials have already been predetermined. And while it is possible to change a TPA or other service providers, a collective agreement by the group is required to do so.

Group captives require less collateral and capitalization than single parents. There are some capitalization requirements for a group, but not as much as a single parent.

Why form a captive if I’m currently on a deductible?

You may not want to. Depending on what you want out of your insurance program, a deductible may be a perfect fit. For example, if cheap rates are your top goal, a large deductible is likely your best bet, as you immediately receive a rate reduction for taking on the risk.

But let’s say you’re looking for more control, predictability and stability over your insurance pricing. By prefunding your losses in a financially advantageous way, a captive can smooth out your insurance costs, providing greater consistency. Because premiums are determined by the captive member’s experience, captives are able to insulate their insureds from the cyclical rates of the traditional market. The result is a greater ability to oversee more even pricing of your insurance program.

Do I need a fronting carrier?

It depends on the coverages you want. If your captive is going to insure liability coverages such as auto liability and workers compensation, then you may well need a fronting carrier. Fronting carriers are used to meet statutory guidelines, as well as to demonstrate your captive has the financial backing to pay claims. Some contracts may also require that the insurance program be written through a fronting carrier. For example, agreements with a bank or shipper.

How important is the data submitted in forming a captive?

On a 10-point scale, it’s an 11. The transparency is critical. If the data submitted during captive formation does not show the whole picture, the captive is set up to fail from the outset.

No matter what business the parent is in, the captive is an insurance company. Insurance companies make money through investment returns and underwriting profit. If your captive is not bringing in enough in premium to pay the claims going out, not only is there no underwriting profit, which will, in turn, diminish investment returns. This will also jeopardize the captive’s longevity – making it possible the captive won’t survive long enough to meet its underwriting liabilities. For actuaries to accurately price your insurance program it is imperative they receive accurate data on which to base their calculations.

What other questions should I ask?

That depends on you, and what you want to achieve. For a confidential discussion of how captive insurance might benefit your company, contact Atlas Insurance Management.

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