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

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.

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

What to look for in a captive manager

Choosing a captive manager is the most important decision a company makes when it establishes a captive insurance program, so it’s critical to hire the right professional.

“Just because someone has an impressive background as a lawyer or an accountant doesn’t mean they know how to run a captive program,” says Andrew Seger, general counsel at Imprise Financial.

“The more effective captive managers will have several years of direct responsibility for a program, so check their references,” he says. “And whoever is picked should really be excited to get involved with the program. Their attitude is important because they are who a company will be working closely with for a long time.”

Smart Business spoke with Seger about what to look for in a captive manager.

What is a captive manager’s role in a captive insurance program?
Captive managers provide prospective clients with advice on whether a captive insurance program is an option that will meet the company’s needs and goals. They handle the implementation and management of the entire program, and make sure the program stays compliant with all applicable state and federal regulations.

What professional backgrounds do captive managers come from?
People with a variety of professional backgrounds will market themselves as captive managers, such as accountants, lawyers and insurance brokers. Many of them are smart, capable people. But if they don’t have direct experience managing a captive program, they likely won’t understand the nuances and regulations involved, and that can be disastrous for a program.

A captive manager should be devoted to managing a captive program and should be independent, not trying to sell the services or products of an insurance company, or an accounting or law firm. If they require a client to use a certain bank or adviser, for example, there is likely a conflict of interest.

What are the more important qualities to look for in a captive manager?
Look for a proven track record of successful program management. Ask how long they’ve been in business, whether it is their main business or if they do something else, and how many captive programs they have established.

Outside of experience, look for a captive manager who is innovative enough to meet their clients’ needs and goals. They shouldn’t be locked into the status quo, but rather be willing to get creative.

Demand financial transparency from a captive manager. Companies should ask potential captive mangers about their fee structure. Some may hesitate to disclose specific fees or say they’re on a sliding fee schedule. Those are red flags. Look for a captive manager who provides the charges clearly and upfront.

How much time should companies expect it will take to find a captive manager?
All companies move through the process at their own speed, with some taking longer than others to conduct their due diligence. It may be helpful to get recommendations from trusted advisers or clients that know of or work with captive managers. Ultimately, all that’s important is that the company is comfortable with its decision because it will be working with that person for the duration of the program.

Once a decision is made, how can companies gauge the effectiveness of their captive manager?
The best way to check on the performance of a captive manager is to look at the performance of the captive program. It should live up to the expectations set by the captive manager in the initial meetings.

Ensure that the claims being paid by the captive program are consistent with what the captive manager suggested upfront.

Some captive managers pass along hidden fees to their clients that can be tough to spot. That’s why really strong financial transparency is important. Make sure that during checkups the fees are clear and the captive program is performing as expected.

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