March 04, 2021

A Business Case for Captive Insurance

6 min read

R. Wesley Sierk, III ; Managing Director, Risk Management Advisors

A common question prospective captive insurance company owners ask us is to “make a NON-TAX business case for captive insurance.” Surprisingly, we don’t get asked as often about captive insurance structures or best practices. YES, we can easily make a business case for captive insurance. So, if you’re a business owner looking to start a captive insurance company, keep reading to find out how to make a non-tax business case for a captive insurance company.

Primary Purpose and Market Context

Before discussing making a business case for captive insurance, it’s first essential to understand the purpose. The primary purpose of captive insurance is to help enterprises with risk management. Captive insurance companies offer uniquely designed solutions for enterprise risk and are helpful for enterprise risk management. They are a formalized way for organizations to finance their risk. Captive insurance companies are becoming increasingly popular as organizations have to rely on them more. Due to the COVID-19 pandemic, insurance premiums have continued to increase exponentially. At the same time, traditional insurance companies are starting to cut the coverage they offer.

One glance at captive insurance company statistics shows that over 90% of Fortune 500 companies have captives. The main reason why captives are so common among Fortune 500 companies is that they’re a great way to reduce the total cost of their business risk.

Additionally, a captive is an excellent way for organizations to invest excess capital. Instead of leaving the organization’s capital identified for risk ‘premium,’ they can pay premiums for that risk into the company’s captive, giving them greater flexibility. Not only can they finance their own risk, but they may also have more investment options available to them.

How Our Clients Are Using Captive Insurance

While the benefits listed above are a few general reasons to set up a captive insurance company, here are examples from a few existing captive insurance owners we surveyed about why they initially formed their captive insurance companies. After reviewing the messages from several captive insurance partners, we identified the primary reason clients started captive insurance as mitigating risk in commercial activities. Captive insurance companies are a formal vehicle that organizations use to funnel excess risk from their books.

Save On Group Medical Insurance

Employee benefits and group medical services are among the fastest-growing areas for captive insurance. The cost of medical insurance continues to increase due to systemic issues. That is why creating your self-funded group medical insurance plan using a captive insurance company is a much better plan. With a captive insurance company, businesses can cover the employee’s medical benefits and provide a superior plan while saving up to 30% of the premiums charged by traditional medical insurance providers.

Optimize Investment Strategy

Insurance companies tend to pay taxes differently than other businesses. They’re only taxed on their investment earnings. As a result, in a captive insurance company, many captive insurance company owners can choose long-term investments. They buy and hold long-term financial instruments to get the most out of the investment return while minimizing the investment income to the captive insurance company.

Operational Benefits

Another popular reason we heard from captive insurance company owners is they provide significantly greater control over their insurance policies. Traditional market insurance policies are written primarily by the Insurance Service Office (ISO) and don’t differ from provider to provider. The ISO is funded almost exclusively by traditional carriers. The result is that the policies purchased by businesses in the traditional market are written to favor the carriers, NOT the businesses that purchase them. On the other hand, going with a captive insurance company allows organizations to provide insurance coverage for the exact risks they face. Instead of complying with traditional insurance providers' different coverage options, they can write the same coverage they need to cover the risk of their unique business and risk.

Access To Reinsurance

When surveyed about why they chose to set up a captive insurance company, the fourth most common reason was that it gives them access to reinsurance. Reinsurance is essentially ‘insurance for insurance companies’. It allows captive insurance companies to decide how much risk they will take and how much they choose to offload to other insurance companies worldwide.

Buy Down Retentions

Another advantage clients have after forming a captive insurance company is that it allows them to buy down their retentions. While the organization might already take a million dollars per claim, certain situations might want to divide the risk. That’s where captive insurance companies come into the equation. The business can keep a portion of the liability on the corporate books and offload the remainder of the risk to the captive insurance company.

Centralize Insurance In One Place

Lastly, clients choose to form a captive insurance company because it allows them to manage all their risks in one place. Instead of having many different brokers and insurance carriers, they can issue insurance from the captive insurance company and purchase reinsurance to control the company's liability.

Making the Business Case

There are several NON-TAX reasons businesses choose to form a captive insurance company. The existence of a captive insurance company makes the business more profitable and appealing to third parties. Remember, since you can’t beat the traditional insurance companies, you might as well BECOME ONE.

Find out if a captive insurance company is the right fit for your business.

Take the assessment to learn more:

https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment

The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.

R. Wesley Sierk, III ; Managing Director, Risk Management Advisors

Wesley Sierk is a recognized authority in the realm of captive insurance company design and management. As Managing Director and Lead Strategist for Risk Management Advisors, Inc., he possesses an unmatched track record that spans nearly 30 years, with a focus on empowering profitable, closely held businesses. Wesley's expertise isn't just limited to consultation; he's profoundly adept at strategic implementation. He has partnered with leading homebuilders, real estate developers, manufacturing enterprises, and professionals in sports and entertainment, providing them with unparalleled insights and solutions. A hallmark of Wesley's career has been his unwavering commitment to his education. He holds esteemed designations like the Chartered Financial Consultant (ChFC) and Chartered Life Underwriter, both awarded by the American College since 1996. Further amplifying his credentials is the CRIS (Construction Risk and Insurance Specialist) recognition, secured in 2006. Notably, he's among the rare individuals globally to have earned the Associate in Captive Insurance (ACI) designation, a testament to his profound understanding of the subject. Beyond his direct work with clients, Wesley takes immense pride in working hand-in-hand with other professionals, including CPAs, Attorneys, and Financial Advisors. This collaborative approach ensures thorough due diligence and optimal plan design implementation. An accomplished author, Wesley has penned critical works like Taken Captive: The Secret to Capturing Your Piece of America's Multi-Billion Dollar Insurance Industry and You Can Make It, But Can You Keep It?. The latter serves as a guiding light for the affluent, teaching them strategies to preserve their hard-earned assets. In the realm of speaking engagements, Wesley is a coveted name. Whether it's insurance industry gatherings or legal and accounting symposiums, he's regularly called upon to demystify the intricate dance between traditional insurance markets and the potential of captive insurance entities. Under Wesley's leadership, Risk Management Advisors remains a beacon of innovation, committed to elevating clients' financial well-being and mitigating risks in an ever-evolving landscape. He is married to Leslie and has two 'not so young' children. Their son is attending the University of Tennessee studying entrepreneurship and risk management. While their daughter finishes up her high school years. They love to travel, golf, cook and hike with their two huge dogs.