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 captive insurance best practices. Such is the nature of the internet. In this quick guide, we’re going to 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 out there, but these few tend to be the most prevailing in terms of misinformation.
This is an extremely common myth that can be easily debunked. The way we start out with clients is we get copies of all of their existing insurance portfolios or insurance policies. Then, we go through all of those policies and we 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, there may be ten pages of information included and thirty pages excluded, no matter how good your insurance portfolio and your insurance advisers are. There are certain things insurance companies just 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.
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 located in offshore jurisdictions, such as Bermuda, the Bahamas, and the Caymans. These are the common jurisdictions that people think about, but it seems like a new jurisdiction in the United States every day. Now, there are over 32 domestic jurisdictions. When it comes down to it, the visibility of the captive insurance structure has simply increased in the United States. Captive insurance companies have been around for a long time.
It’s important for those interested in captive insurance to understand that the marketplace is not small by any means. In fact, it’s estimated that over 50% of the insurance marketplace globally is put in a captive insurance company in one way, shape, or form in some sort of alternative risk structure. So, it’s actually very large. And there are over 8,000 captive insurance companies globally. It’s estimated that companies like Verizon, Nike, and U.P.S. have close to $2 trillion in offshore captive insurance jurisdictions to protect their businesses in the event that claims appear down the road.
As a curious potential client who Googled information about captive insurance companies, it’s likely that you’ve come across a lot of descriptions of captive insurance companies as common 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 businesses. However, this isn’t always the case and doesn’t ring true for multi-member captive insurance companies. Group captive insurance companies (also known as 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.
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 is going to be in reinsurance for the sole purpose of preventing such a dangerous scenario in the case of substantial coverage events. A reinsurance policy will properly prevent surprise claims, as well as claims that are substantially bigger than expected, from destroying your company’s strength in the long term. Just 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.