Risk management is a critical aspect included in 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 your business has no coverage? A captive insurance manager can help mitigate risk in commercial activities effectively.
It’s a pretty tricky time for captives. Most owners are focused on deciding the policies to include on their captives, if they should create a captive and which captives are most suited for them forgetting the most critical question, “who should you do a captive with?” but before answering that, let's get back to the basics first.
What is a Captive?
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?
The primary purpose of captive insurance is to pay losses and afford the company owner more control over risks and any losses that may occur. In other words, they are an alternative risk transfer tool for financing risk.
There are different types of captives, and code section 831(b) allows captives 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 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 management partner can help you find the right captive that fits your needs.
The Roles of a Captive Insurance Manager
A captive insurance manager will gather all your existing policies and scrutinize them to figure out 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 company.
With the help of Actuarial partners, captive managers determine the amount of premium appropriate for a certain amount of risk and ensure there is a complete coverage package, which means your captive features the essential policies to include inside your insurance company.
Once the manager decides what policies are relevant to complete a coverage package, the captive manager and business owner work with the coverage counsel to draft the guidelines to create a complete package for your captive insurance company and traditional market. Developing appropriate policies ensure there are uniquely designed solutions for enterprise risk.
Once the policies are defined, captive managers determine which claims are covered and which ones are not covered. They work with clients to ensure that all claims are submitted in time and are paid from 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 manager needs to prepare financial statements monthly. Captive insurance arrangements are typically deductibles: captive insurance reserves money to pay future losses. It's the work of a captive manager to ensure that there's a check-in balance and the reserves are accurately represented. Their role involves gathering all bank accounts and figuring out all transactions so that there is a clear picture of the financial status of the captive.
Compile Captive Regulatory Compliance Submission
The captive manager works with the client to compile a submission to the insurance department for approval. They have to ensure that all potential issues are covered in the initial submission. To ensure everyone is on the same page, the manager has to deal with attorneys, CPAs, actuaries, and regulators. Additionally, they have to prepare the documentation required by the insurance department to maintain compliance with captive insurance law.
Dissolve Captive Insurance
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 manager to shut down or dissolve the captive insurance company. There are many options to follow and do correctly.
However, the captive insurance company's timely and correct dissolution or shutting down is equally as important as setting up a captive insurance company.
The critical roles of a captive insurance manager include the following
- Claims handling
- Financial record-keeping
- Captive regulatory compliance
When all the above 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.