How is this possible? The structure to make this happen has existed since the 1950s. Recently, states and, more specifically, state legislatures have started to realize the advantages of allowing businesses to own their own insurance company and the positive impact it can have on both the state’s overall business climate and the state’s economy.
Perhaps you are thinking, “How is this different from self-insurance?” It is true that many organizations have a self-insurance program. In fact, if you participate in the traditional insurance market, you probably already participate in some form of self-insurance. Perhaps you call it a deductible or a risk retention. Both of these terms refer to simple forms of self-insurance.
With a deductible or risk retention, you or your company are taking on the risk of the first $1,000, $3,000, $5,000, etc., of any occurrence, which you might currently think of as an insurance claim. The traditional insurance company will not pay on the claim until you have covered the deductible. This is most often seen when they estimate the claim’s value and then subtract the deductible from the amount they will pay toward the claim.
True self-insurance is different still. You, or your company, may have been unable to secure traditional insurance for a particular risk involved in your daily operations, and you realize that there is a real risk that, at some point, your company may have to spend an unexpected and unbudgeted amount of money to cover this area of risk. In preparation for this unexpected expenditure, an account is created in which you can deposit funds to cover this expense. These dollars will be taxed as part of your annual revenue. The capital trapped in this bucket is of little use as it sits and waits for the unexpected, undesired event to occur so you can dip into the account to pull out the money to cover the claim/risk.
The point of this article is to introduce the idea of owning your own insurance company, also referred to as Owning a Captive Insurance Company, Forming a Captive, or Alternative Risk Financing. Perhaps you have heard about captive insurance related to healthcare, benefits, or worker’s comp, which is one way to utilize a captive insurance program. Still, your company can also use a Captive Insurance Company to cover various property and business-related risks (a.k.a. insurance needs). A Captive Insurance Company is an actual insurance company that you own and is explicitly focused on your company, your risk, and your insurance needs.
All the premium money you have been paying for years to a traditional insurance company can now go to help build your company instead of growing the insurance company. There are several commonly recognized advantages to owning your insurance company, a.k.a. starting a Captive. These advantages are often referred to as the 5 C’s of captive ownership:
- Cost
- Control
- Coverage
- Compliance
- Capacity
Over the next few posts, I will explore and explain each captive advantage, starting with Cost.
You can see the additional posts in this series with a Follow or Connection request.
If you have questions about how your company or organization can benefit from a captive, we would love to connect and answer those questions for you. Look for Part 2 of this series to be published later this week.
