Exploring the World of Insurance Captives
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P&C Insurance: Alternative Solutions
Often times when we think about alternative insurance programs for middle market accounts (roughly $250,000 to $1,000,000 annual premium), captives come to mind. Even on the health insurance side, captives have become a viable option for some staffing companies (listen in on our Assurance University Replay– Staffing Exchange: A Health Insurance Grand Slam).
Captive insurance companies – which are established to finance the risk of a parent group or groups (and sometimes these groups’ customers) – can provide advantages in risk management, insurance savings and taxes. It’s a form of alternative risk transfer used by major corporations, nonprofit organizations and other medium-sized businesses like staffing companies.
How a Captive Works
Instead of purchasing insurance from a third party carrier, a group of staffing owners (or businesses within a particular industry) may decide to retain some of their own risk and form their own insurance company – called a “captive insurer.” This is an attractive option for companies who find a limited availability of certain types of insurance coverage in the commercial market or find that those coverages will be a significant expense.
Benefits of Captives
If properly structured, captives can:
- Reduce total cost of risk
- Improve cash flow
- Give access to the international market of reinsurers
- Increase bargaining power with commercial insurers (if the captive holds a percentage of insurance)
- Provide income tax benefits – premiums paid to a captive insurer may be tax-deductible, depending on how the captive is structured
Captives can be a valuable and strategic risk management tool, but are not the best approach for every staffing organization. For some risk profiles, a captive could ultimately cost more than traditional insurance. If your staffing company is considering a captive or other alternative option, talk with your insurance broker first. Together, consider your company’s:
- Background and financial goals
- Actuarial or data issues, including loss data or exposure information needed, insurance company expense loads
- Reinsurance marketplace potential
- Tax and regulatory issues
- Desired captive design
- Risk management program
Several parameters can help determine whether a captive is a viable option, including:
- Your staffing company should be financially stable and have a good loss history
- You should be able to invest a considerable amount of effort in your risk management program (namely loss prevention/safety)
- You must be able to demonstrate your ability to pay for claims and secure future losses
- You should dedicate considerable attention to the operation of the captive
If you need assistance with any of the above, contact a member of our staffing team today!
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