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.
5 Common Myths of Captive Insurance Companies
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.
1. If I Have Traditional Insurance, I Don’t Need a Captive Insurance Company
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 that’s included and thirty pages of stuff that’s excluded, no matter how good your insurance portfolio is 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.
2. Captive Insurance is a New Thing
This couldn’t be further from the truth. Captive insurance is not a new concept in 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.
The majority of the captive insurance companies that have been 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 every day a new jurisdiction pops up here in the United States. So now, there’s over thirty-two jurisdictions here domestically that do captive insurance companies.
When it comes down to it, captive insurance structure’s visibility has simply just increased in the United States. Captive insurance companies have been around for a long time.
3. The Captive Insurance Marketplace is Small
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 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.
4. Only Large Enterprises Benefit From Captive Insurance
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 insurance captive companies (also known as pool captives) are generally created in order to join together smaller businesses for the purpose of gaining 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. If you’re paying over $100,000 each year in insurance premiums a group captive insurance company could be an excellent decision.
5. If You Have a Captive, 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, 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 partner will ensure this, as reinsurance is part of all captive insurance company programs to protect its captive management partners.
While the advantages of strategic risk management solutions are worth taking additional steps to protect your captive, reinsurance takes care of most of the risks.