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Can a Captive Insurance Program Work for Your Company?

May 6, 2011 4 Min Read Construction
Mario O. Vicari, CPA Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Risk management is an area to which many companies do not pay enough attention. All too often, it is an annual ritual of quoting the cost of insurance coverage rather than a process of evaluating all the options to manage risk, which should balance coverage and cost. Companies that are progressive in managing their risk often move through various types of coverage scenarios, from flat premium to high deductible plans. When payrolls get large enough, a captive is often the alternative that gives companies the best risk management solution.

A captive is an insurance company formed to insure the risks of the businesses that are related to it through common ownership. Essentially, this strategy is based on the fact that the premium a company pays for insurance is based partly on the company’s specific loss experience, the insurance company’s underwriting risk which is related to all the companies in the market, and the insurance company’s underwriting profit. By forming a captive, a company narrows the companies included in the risk pool and therefore can reduce risk and premium costs. Additionally, any remaining profit in the captive is to the benefit of its owners.

There are different types of captives, but the most common among our clients is a group captive. A group captive is owned by a number of companies to provide a vehicle to meet the common insurance needs of the group, which most often include general liability and workers’ compensation coverage. Group captives normally have stringent requirements for participation, including company and premium size, loss experience, and quality of a company’s safety program. A well-organized group captive has a collection of well-run companies that have good safety records, loss experience, and lower risk profiles.

The principal benefits of joining a captive are:

1.  Lower insurance costs. By self-insuring within a captive, the profit of the insurance company is essentially eliminated from the premium cost a company would pay. Additionally, most captives are selective as to the risk profile of the companies it allows to become members. The result is a group of companies with lower loss experience and, therefore, lower insurance costs. In a captive, these savings find their way back to the participants in the form of reduced premiums or dividends.

2.  Control of claims process. When companies experience claims in traditional insurance coverages, they are at the mercy of the insurance company handling the claim and are subject to the decisions they make in managing and closing out the claim.  Captives manage their own claims and normally select partners to manage the captive’s claims.  Captive members are more involved and have more discretion over how claims are managed and settled, which usually results in lower costs.

3.  Flexibility in managing coverage. In buying traditional insurance, many companies may not be able to find a suitable structure for managing specific risks or may not be able to find coverage at all. Within a captive, the owners have a say in how coverage is structured, how much risk to retain and what levels of deductibles make sense. This flexibility allows companies to strike the right balance of risk and cost.

4.  Information sharing. There is an important side benefit of being in a captive. Most companies who participate in captives are serious about managing risk and are incentivized to help each other improve the overall results of the captive. This results in the sharing of best practices among participants to help everyone lower their loss experience and improve the results of the captive.

Captives are truly a way for a company to realize a return on investment for their risk management and safety programs. Consideration of a captive should be on the management agenda for any company interested in improving its bottom line.

Mario O. Vicari can be reached at Email or 215.441.4600.

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Mario O. Vicari, CPA

Mario O. Vicari, CPA

Director, Family-Owned Businesses Group Co-Leader, ESOP Group Leader

Construction Specialist, Family-Owned Businesses Specialist, ESOPs Specialist, M&A/ Transaction Advisory Services Specialist, Transition/Exit Planning Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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