April 15, 2020

Advantages of Captive Insurance Companies

5 min read

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

Advantages of Captive Insurance Companies

If you’re a business owner, you’re probably all too familiar with paying vastly more in premiums than you ever receive in a payout. In our experience, this is the reality for 99% of even the most successful organizations. Now, we're not trying to vilify and demean traditional insurance companies. These businesses aim to generate profits while pleasing investors and board members, and revenue increases for such a company aren’t likely if their model is centered around meager premiums and monstrous payouts.

How Can Your Business Offset Insurance Costs?

Many businesses feel somewhat hamstrung due to the less-than-ideal terms of their insurance contracts. You can scour the ends of the earth for an insurance partner that won’t dip severely into your profits. Almost 100% of you’ll return empty-handed and highly discouraged. Well, what if we told you that you could start your own captive insurance company to help you control costs over the short, medium, and long term? Let’s take a closer look at all that’s involved in a captive insurance company.

What is a Captive Insurance Company?

For the expressed purposes of writing property and casualty insurance to a select group of insureds, captive insurance companies are C-Corporations or legal entities taxed as such. Starting your own captive insurance company allows you to lower commissions, lower state taxes, control your investment, and set your reserves. Such control over your insurance offers the following tremendous long-term, big-picture benefits:

1. Handling Your Own Claims

Workers comp generally offers a 50% margin with traditional insurance. In other words, these companies expect to pay $500 thousand on $1 million. If the end-of-year claims are $800 thousand, the traditional insurance provider can set higher reserves to capture the extra $300,000. Even if only $100 thousand has been paid out, the company can add that amount to your premiums for the preceding three years. Conversely, your captive insurance company doesn’t have to deal with the operating expenses, overhead, or profit requirements as traditional carriers do. Also, there won’t be any issues with maintaining high rates to cover losses from high-risk insureds. Your captive’s primary focus is on your own company, and its purpose can strictly be to lower insurance costs via enhanced risk management.

2. Paying Yourself

Setting your reserves and claims allows you to accumulate dollars at a far more significant rate for your company. Money can be held in your reserves when paying cash to your captive insurance company. That money can also be invested to generate a more sizeable long-term return. Here’s a scenario: Imagine you have $500 thousand in standard claims. Couple that with paying $1 million to your captive company and $100 thousand in claims. In this case, you’ll hold onto $900 thousand in your account inside the captive company while receiving the investment earnings each year.

3. Enterprise Risk Management is Customized

A traditional insurance company can’t offer you a plan with terms catered to your business's unique needs. These businesses are too broad and couldn’t meet your specific requirements, nor could they provide applicable premiums and payouts. Even if a traditional company is industry-specific, it will still be spread thin. It’s not as though all organizations within your industry operate precisely the same. Whereas your captive insurance company will be wholly specialized and bespoke to manage your business’s risk. Every tiny detail involved throughout your organization can be weighed into various terms, generating the most ideal premiums and payouts.

4. You Can Leverage Reinsurance Pricing

Standard commercial insurance companies purchase something called reinsurance. After assuming their clients' risk, insurance companies regularly obtain their own insurance. This practice is followed to compensate for claims that these businesses might be stuck paying on behalf of their insureds. An incredibly valuable aspect of reinsurance is that it's available at a wholesale price. As a captive insurance company, you benefit from this reinsurance wholesale market, which gets you coverage at favorable rates. Since reinsurance offers direct access, you can benefit from tremendous savings. You won’t be dealing with fees paid to agents, brokers, and the first-level insurer profit markup. The excellent prices aren’t the only benefit of reinsurance. Your company — through its captive — will have complete control over its choice of reinsurance partner.

Is it Time to Start Your Own Captive Insurance Company?

Is your company amongst the 1% of organizations that receive more in claims than they pay in premiums? If not, you should strongly consider starting your own captive insurance company. This article has only scratched the surface with the benefits. If you want to learn more, contact us today.

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

Take the assessment and find out:

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.