Common Myths of Captive Insurance Companies

If you’re thinking about forming a captive insurance company, there’s a good chance you’ve read accurate and inaccurate information about captive insurance law and best practices. Such is the nature of the internet. In this article, we'll cover a couple of myths about captive insurance companies that may have kept you from considering them as part of your own business.

There are likely even more myths about captive insurance companies, but these few tend to be the most prevalent regarding misinformation.

Myth #1: If I Have Traditional Insurance, I Don’t Need a Captive Insurance Company

This is a pervasive myth that can be easily debunked. We start with clients by getting copies of their insurance portfolios or policies. Then, we go through all those policies and give the client a report that says what is included in their insurance and what is excluded from their insurance. When you go through an insurance policy, ten pages of information may be included and thirty pages excluded, no matter how good your insurance portfolio and your insurance advisers are. There are certain things insurance companies don’t want to cover. Those excluded items can be put inside your captive insurance company. The result is better coverage with a more well-rounded insurance portfolio.

Myth #2: Captive Insurance is a New Thing

This couldn’t be further from the truth. Captive insurance is not a new concept by any stretch of the imagination. We’ve had them in the United States for over a hundred years, and they’ve existed globally for far longer. Most captive insurance companies used in the past were in offshore jurisdictions, such as Bermuda, the Bahamas, and the Cayman Islands. These are the common jurisdictions people think about, but it seems like a new jurisdiction in the United States daily. Now, there are over 32 domestic jurisdictions. Regarding it, the visibility of the captive insurance structure has increased in the United States. Captive insurance companies have been around for a long time.

Myth #3: The Captive Insurance Marketplace is Small

Those interested in captive insurance need to understand that the marketplace is not small. It’s estimated that over 50% of the global insurance marketplace is invested in a captive insurance company in some alternative risk structure. So, it’s substantial. There are over 8,000 captive insurance companies globally. Companies like Verizon, Nike, and UPS have close to $2 trillion in offshore captive insurance jurisdictions to protect their businesses if claims appear down the road.

Myth #4: Only Large Enterprises Benefit from Captive Insurance

As a curious potential client who Googled information about captive insurance companies, you’ve likely come across many descriptions of captive insurance companies as standard choices for large corporations. It’s also a common myth that captive insurance companies are only started by enterprises that own multiple businesses and operate globally. In the case of single-member captive insurance companies, it is common for them to be formed by very big firms. However, this isn’t always the case and doesn’t ring true for multi-member captive insurance companies. Group captive insurance companies (or pool captive insurance companies) are generally created to join smaller businesses to gain insurance negotiation power. And when it comes down to it, a business’s size or profits don’t matter at all when it comes to considering captive insurance. It’s all about the relative scale of your company’s business insurance premiums. A group captive insurance company could be an excellent decision if you’re paying over $100,000 each year in insurance premiums.

Myth #5: If You Have a Captive Insurance Company, a Single Large Claim Could Destroy Your Business

Wrong again!

This myth can be debunked with just a single term: reinsurance.

If you operate a one-member-only captive insurance company or are part of a larger group captive insurance company, a portion of your investment will be in reinsurance to prevent such a dangerous scenario in the case of substantial coverage events. A reinsurance policy will properly avoid claims of surprise, as well as claims substantially bigger than expected, from destroying your company’s strength in the long term. Being a group captive insurance partner will ensure this, as reinsurance is part of all captive insurance company programs to protect its captive insurance management partners. While the advantages of strategic risk management solutions are worth taking additional steps to protect your captive insurance company, reinsurance takes care of most of the risks.

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

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