How a company can make optimal use of its captive insurance program

Insuring a company through a captive program offers many benefits. Primarily, it provides coverage for risks that traditional carriers typically won’t insure. However, there are underutilized aspects of a captive program that if actualized, could provide much more than risk mitigation.

“To fully unlock the potential of a captive program, all of its options must be understood,” says Andrew Seger, general counsel at Imprise Financial.

Smart Business spoke with Seger about the ways in which a captive insurance program can protect a business and open up opportunities to grow revenue.

What are the aspects of a captive program that companies commonly underutilize?
Captive programs can help companies realize cost efficiencies by bringing their insurance spend down while increasing the deductible and covering risks that might otherwise remain uninsured. For example, many middle-market companies overlook warranty risk.

Though most products have a service warranty, companies tend not to comprehensively manage their warranty claims. Operating a captive program provides good claims data, which enables a company to use analytics to make more informed decisions on warranty programs, which can improve their decision-making around the products or services they choose.

In some cases, companies carry the risks of third parties, such as in a franchisor-franchisee relationship. Companies often don’t realize that they can bring such third-party risks into their captive program. If the captive is structured properly, the franchisor can provide coverage for its franchisees and in the process, drive down costs and capture profits at the franchisor level while offering franchisees good coverage.

Why are companies not taking full advantage of these aspects of the program?
Business owners and managers don’t spend a lot of time thinking about their risk management program. They spend their time leading and growing their companies day to day and only think about insurance when it’s time to buy a policy or make a claim. This is where a good captive manager can help.

It’s important that a company with a captive digs in and considers areas where a program could add value. Just seeing it from a financial perspective or claims data perspective won’t make apparent its entire value potential. It needs to be seen from the perspective of all stakeholders to understand how it can add value to bolster the long-term success of the program.

How can companies better leverage their captive programs?
Think about it as adding value to as many stakeholders in the organization as possible. Leverage the captive program to provide additional bottom-line profitability by driving down the cost of insurance while providing valuable coverage that might not be available through traditional carriers.

A captive program also can be leveraged to build the company’s overall asset base. As the captive program matures, it can become a diversified revenue stream that also builds insurance assets, all while increasing the value of the organization.

Business owners and managers should meet with their captive representative periodically to talk about the business, review whether the captive is being fully utilized — whether it is capturing the most value for the company and providing value to managers — and key-in on opportunities to better leverage the program that they might be missing.

What should companies expect as a result of better utilizing their captive programs?
There are two primary benefits to using a captive program to its fullest. First, doing so drives down the cost of a company’s risk management program as a whole, while increasing revenue.

Second, consider the program as building an insurance asset — a war chest that can be used in the event of catastrophic loss, a primary reason to get into a captive.

These programs are dynamic and can bring value to companies as long as they’re utilized to the fullest. Captive programs offer an opportunity to decrease risk, maximize cost efficiencies, improve the balance sheet and increase the overall value of an organization, especially one that can see a liquidity event or exit coming soon.

A captive insurance professional can help a company find ways to unlock its potential.

Insights Insurance and Risk Management is brought to you by Imprise Financial