DIY Insurance- Captives: Pros & Cons of Going to DIY Insurance (Captive)
Home Depot and Lowes, along with a binge of HGTV, can make one feel like undertaking a full kitchen renovation. Gut the kitchen, go buy the materials and your new makeover is ready to unveil!
Reality- it’s not as easy as it looks. Gutting the kitchen? Well, that’s not too tough. Putting it back together is what often leads to frustration, wasted time and money, and, ultimately, a phone call to a professional.
In many respects, Captive Insurance programs are like DIY insurance. These programs are now much more readily available to the traditional, middle-market client. What used to be a large company alternative to traditional risk transferring (insurance purchase), is now being considered by all size of businesses.
I was at a client office and I heard a fellow business owner ask the client to “join my captive” program. These conversations are happening all of the business landscape. In many cases, we (agents) are bringing the idea to the table for consideration. Just as frequently, other business owners or consultants are discussing the idea at the country club, the bar, or in the board room.
Should a company consider one? What are the pros and cons of a captive?
Captive Insurance has a few different structures. A single-cell or single-parent captive is a traditional captive program. These programs remain exclusive to larger, well capitalized companies who can essentially become their own insurance company.
Group captive programs pool together multiple companies (heterogeneous or homogenous industries) to form an insurance carrier. Each member of the group is responsible for funding their own losses and share in the catastrophic losses, profit and expenses. Ownership of the captive is typically an option, with mandatory board representation & decisions within the captive.
What are the pros and cons of “going to a captive?”
- Total spend on loss funding and excess insurance may be less than fully insured options
- More control over claims administration and outcomes
- Opportunity to receive money preserved for losses not incurred returned with interest
- Dividend and equity of the captive insurance company
- Tax savings and better tax rates on flow-back of unpaid loss money
- Costs are truly based on an individual performance, not subject to market fluctuations or systemic pricing issues
- Pre-funding of potential losses and collateral necessary each year
- Total losses may exceed projected and the costs paid could far exceed guaranteed cost options
- Loss funds may be “assessed” due to high claims or claims of others
- Loss funds and claims held for 3-5 years for development and other potential factors
- Mandatory participation in board meetings and risk control assessments
I believe captive programs are great solutions for companies with the proper risk management procedures in place. A company committed to safety in their daily actions, including training & tracking safety initiatives, could be a ready to consider the potential benefits of a captive program. The companies who proactively manage claims and take an ownership in the results can reap great financial returns for the performance. The proactive safety companies can take their insurance costs into their own hands and greatly reduce the impact of market fluctuations.
The ease of entering a captive is sometimes downplayed. The commitment is a long-term strategy that should be carefully considered by your advisors, including your accountant(s) and attorney(s). Just like the “DIY” kitchen project, it is important that companies consider the entire process, not just the initial allure. With the right guidance and the proper controls, both the DIY kitchen project and the DIY insurance project save money and provide long term satisfaction.
by Brian Pilarski