How to determine if a captive program is right for your company

Any company with good cash flow that’s looking to reduce its insurance costs should explore a captive insurance program. These programs can cover all the same risks as a traditional insurance program — workers’ compensation, automotive, employee benefits, etc. — while offering an opportunity to customize coverage.

“Companies that feel they are underinsured in some areas might be better off if they self-insure those particular risks,” says Andrew Seger, general counsel at Imprise Financial. “The decision tends to come down to the company’s appetite for risk, whether it has a favorable claims history and if the cash flow is available to cover its risks.”

Smart Business spoke with Seger about when companies should explore the option of a captive insurance program.

What determines whether a captive program makes sense for a company?
A captive insurance program enables a company to self-insure programs that would otherwise be insured by a third party. Whether a company should self-insure is largely determined by a company’s claims history. If claims are costing more than the premium the company is paying, it’s better to have someone else bear that risk.

A company with high premiums, low claim frequency and palatable risk is a good candidate for a captive program. In other cases, a company may not be able to cover certain risks through a third-party insurer and a captive program may be the only option for coverage.

How do captive programs compare to more traditional plans?
The essential difference between the two options is who bears the risk. Determining which program is best for a company starts with the question of whether the company wants, or is capable of, taking on its claims risk.

Can a company create a financially stable program for the long-term? If so, a captive program offers a chance for companies to write their own policy to cover risks for which it can’t otherwise find acceptable coverage.

Unlike traditional insurance, the company or the company owners own the insurance program that’s run through a captive. That creates revenue and investment options not available with traditional insurance.

What are some of the more significant benefits of captive programs?
Captive programs offer a wide range of benefits, but the draw for most companies is coverage for risks that are uninsured or underinsured. Companies can write coverage specific to their needs as a way to control risks and manage claims more efficiently. This comes into play with companies that see an area for which coverage is eroding because of exclusions.

There are cases in which a company uses its captive program to insure affiliates, customers or vendors. This can become a new profit center for companies, adding value to the bottom line through the creation of a long-term asset.

Tax efficiencies also become available and can be used to make a captive program financially feasible, even for small companies.

What should companies understand about implementation and administration?
Most companies hire a captive manager to handle the implementation and administration of a program. The key is picking a good one. Knowledgeable and experienced captive managers bring a turnkey approach to all program responsibilities so business owners can focus their attention on growing the business.

As the program is implemented, expect the captive manager to communicate regularly throughout the process. It’s a critical aspect of making a captive program work.

Who should companies turn to in order to learn more about captive programs?
Talk with an experienced captive manager, someone who has worked in a captive program and is willing to give candid advice without expecting anything in return. He or she will take the time to explain the program and explore whether the company has the right risk profile for it.

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