February 10, 2022

Reasons Not to Set Up a Captive Insurance Company

3 min read

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

Reasons Not to Set Up a Captive Insurance Company

Understanding the Limitations of Captive Insurance Structures

As businesses grow and become major brands that are well-known among the public, the risks faced by the enterprise also increase. Large corporations face many risks in their daily operations - even small errors or faults can result in serious lawsuits against the company. Risk management is crucial but can also become confusing - especially for owners who do not know the sector. Seeking out sophisticated risk management advice can help the business owner better understand the options.

An 831(b) captive insurance structure is often advised. While the advantages of strategic risk management solutions that utilize a captive insurance structure are easy to find, it should be noted that there are a few negative factors, too.

The Possible Drawbacks of a Captive Insurance Company

Although the number of captive insurance companies registered has increased by over 6,000 since 1980, several companies still do not use this strategy. Sure, certain enterprises can benefit from a captive, but this does not account for every scenario. We take a closer look at some drawbacks associated with this form of private insurance program management.

The major drawback often lies with the company and its owners. A lack of expertise in the insurance market can result in havoc when implementing a captive insurance company without understanding how the process works. The enterprise owner should understand how to mitigate risk in commercial activities through a captive insurance company and have knowledge of the market in general before attempting to initiate their own entity.
A long-term commitment is required when forming a captive insurance company, which is not something that certain business owners may be looking for immediately. Thus, a captive insurance company may not be the best option if the owner seeks a shorter-term solution.
When a company does not have a defined strategic objective in terms of risk management, it might also want to consider other solutions. The company owner needs to understand precisely what they are attempting to achieve by forming a captive insurance company. Without this objective, it can be hard to set things in motion.

Strategic Considerations

Captive insurance companies have benefits and drawbacks when used as a security protocol for enterprises. Learning more about best practices for captive insurance can help, but the business owner should also realize when an alternative solution might be better.

Is a captive insurance company the right fit for your business?

Click the link to start the assessment:

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.