Do You Understand Your Insurance Coverage
We are inherently bad at reading contracts, terms and conditions, and other similar documents as a society. A 2017 survey conducted by Deloitte found that 91% of US consumers agree to terms and conditions without reading them. When it comes to insurance, we think we are doing a better job, but of the 86% of people surveyed by Trusted Choice – a nationwide consumer-facing brand for Independent Insurance Agents and Brokers of America- who thought they had a strong understanding of their insurance coverage were unsure or incorrect about the coverage provided in their policy when questioned.
Captive Insurance is Not New
Captive insurance has existed since the 1950s and has slowly increased in popularity as both states and businesses start to understand the benefits. As previously discussed in part 2 of this series, controlling cost is one key advantage of a captive, as rates are based on the losses/behavior of you as the captive owner and the few additional members that may be part of the captive, not the behavior of an entire market.
Types of Commercial Insurance Coverage
There are a variety of commercial insurance lines that can be included in a captive:
- Commercial Property Insurance
- Commercial General Liability (CGL)
- Commercial Auto Insurance
- Inland Marine Insurance
- Workers’ Compensation
- Business Owner’s Policy (BOP)
- Business Interruption Insurance
- Commercial Umbrella
- Equipment Breakdown
- Professional Liability
- Errors and Omission (E & 0)
- Directors and Officers (D & O)
- Employee Practices Liability Insurance (EPLI)
- Product Liability Insurance
- Cyber Liability
- Environmental Liability
- Fiduciary Liability
- Crime Insurance
- Surety Bonds
- Ocean Marine Insurance
- Protection and Indemnity (P & I)
- Trade Credit Insurance
- Political Risk Insurance
- Media Liability Insurance
- Terrorism Insurance
- Technology Errors and Omissions
- Builder’s Risk
- Glass Coverage
This list covers over 25 types of commercial insurance coverages that are typically available to businesses through “traditional” insurance, which can also be included in a captive insurance program. However, there are still numerous other lines of niche coverages for niche industries and specialized products.
One of the true advantages of a captive is that you can include both “traditional” insurance lines and hard-to-place risks or lines of coverage. This is one reason captives are also known as Alternative Risk Transfer. It cannot be overstated how beneficial these “specialty” lines of coverage can be to the long-term health of the organization.
What happens if there is a Major Claim in the first year?
Everyone asks, “What if something happens in the first year that takes down the captive?” Another unique advantage of having a captive is the access to the reinsurance market. Reinsurance companies insure insurance companies. These considerations are all part of the premium determined by the actuarial study, which helps create premiums based on your unique captive insurance program.
Risk Management
The other mitigating factor in mitigating claims is a good risk management program. When thinking about a captive and the types of coverage you will include, you will also want to consider your risk management program. The more emphasis you put on risk mitigation, the less likely you will have a significant claim. Installing a new risk management plan can be a heavy lift in the early years, but it continues to pay dividends as you build a risk-aware culture. If you already have a risk mitigation/risk management program, it may only need a few updates and revisions to maximize its benefit and help reduce risk for the captive.
I hope you are starting to get the idea that you genuinely are in Control of the insurance company with a captive, and Control is the topic of the next article in this series. Look for Part 4 – Control: Do You Own the Insurance Company or Does it Own You, which will be published later this week. If you want to be notified, please follow me on LinkedIn. Also, we would love to discuss how a captive might work for your organization; please get in touch with me at douglas@ballingerandassociates.com.
