Risk management is a critical aspect of every business, and most business owners are familiar with traditional property and casualty policies. However, what happens when your company is exposed to risks for which it has no coverage? A captive insurance manager can effectively mitigate risk in commercial activities.
It’s a tricky time for captive insurance. Most owners are focused on deciding which policies to include in their captive insurance companies, whether to create one and which ones are best suited for them, forgetting the most critical question:
“Who should you create a captive insurance company with?”
Before answering that, let's get back to the basics first.
What is a Captive Insurance Company?
A captive insurance company is an insurance auxiliary of a non-insurance parent company that provides risk mitigation for a group of related companies or the parent company and is owned by the insurer. This type of self-insurance is a smart way to take advantage of private insurance solutions and fill gaps in insurance.
What is the Purpose of a Captive Insurance Company?
The primary purpose of captive insurance is to pay losses and afford the company owner more control over risks and any possible losses. In other words, they are an alternative risk transfer tool for financing risk.
There are different types of captive insurance, and code section 831(b) allows captive insurance companies that receive anything below $2.3 million of premium income annually to be taxed only on their investment income and not on premium income.
How Can Captive Insurance Management Partners Help?
Regardless of the size and complexity of your business, conventional insurance companies may be cost-effective and easy to use. However, if your enterprise risk management situation requires a personalized approach, a captive insurance management partner can help you find the right captive insurance company that fits your needs.
The Roles Of A Captive Insurance Manager
Underwriting
A captive insurance manager will gather and scrutinize all your existing policies to determine what is covered and what isn't. They'll then determine the kind of policies you should have depending on your type of company. Using the information they gather, they'll evaluate the coverages appropriate to add to your company and captive insurance best practices and procedures that will impact the success of your captive insurance company.
Price Setting
With the help of actuarial partners, captive insurance managers determine the premium appropriate for a certain amount of risk and ensure a complete coverage package. This means your captive insurance company features the essential policies to include inside your insurance company.
Draft Policies
Once the manager decides what policies are relevant to completing a coverage package, the captive insurance manager and business owner work with the coverage counsel to draft the guidelines and create a complete package for the captive insurance company and traditional market. Developing appropriate policies ensures uniquely designed solutions for enterprise risk.
Claims Handling
Once the policies are defined, captive insurance managers determine which claims are covered and which ones are not. They work with clients to ensure that all claims are submitted on time and paid by the captive insurance company. Once they submit the claims, they work with an actuary to set reserves for each claim.
Keeping Financial Records
The captive insurance manager needs to prepare financial statements monthly. Captive insurance arrangements are typically deductibles, which reserve money to pay future losses. The manager ensures that there is a check-in balance and that the reserves are accurately represented. Their role involves gathering all bank accounts and determining all transactions so that there is a clear picture of the captive insurance company's financial status.
Compile Captive Insurance Regulatory Compliance Submission
The captive insurance manager works with the client to compile a submission to the insurance department for approval. The manager must ensure that the initial submission covers all potential issues. To ensure everyone is on the same page, the manager must deal with attorneys, CPAs, actuaries, and regulators. Additionally, the manager must prepare the documentation required by the insurance department to maintain compliance with captive insurance law.
Dissolve Your Captive Insurance Company
If the business owner decides to sell the business because they don't want to be in the captive insurance business anymore. It’s the responsibility of the captive insurance manager to shut down or dissolve the captive insurance company. There are many options to follow and do correctly.
However, timely and correct dissolution or shutting down of a captive insurance company is equally important as setting it up.
Recap
The critical roles of a captive insurance manager include the following
- Underwriting
- Claims handling
- Financial record-keeping
- Captive insurance regulatory compliance
When all four essential items work together, you have a great system and a smooth-running insurance company. When any of the four is not working correctly, the system is unreliable and unstable.
Find out if your business is the right fit for a captive insurance company.
Click the link to start the assessment:
https://www.riskmgmtadvisors.com/captive-insurance-fit-assessment
