How can businesses determine if creating or joining a captive is the right move for their needs?
Companies shouldn’t measure the success of their program a year from now but instead look back and ask themselves what they wish they had done five years ago.
Are they glad they stayed with guaranteed cost insurance? How would their financials be different today if they had been in a captive five years ago? That is a pretty good indication of whether this is a company that is right for captives.
It’s not complicated. Look at the amount of losses they’ve had and compare that to their premiums. If they believe they pay too much for insurance to finance the amount of losses that they have had, they might be a good candidate for a captive.
Why would a company want to get into the business of insurance if that’s not its core competency?
If you are in, for example, the manufacturing industry, it’s common to think, ‘What do we know about the insurance business? Wouldn’t that be a losing proposition for us to step into the insurance business?’
However, if you consider keeping your employees and the general public safe from harm, then you are a good candidate for a captive. That’s because it is all about controlling your workers’ compensation losses and auto liability and general liability losses. If your company’s culture is focused on safety, that makes you a good candidate.
The actual running of a captive insurance company is left to people who do that for a living. You hire a captive manager who runs your company and who, in turn, engages a reinsurer who protects you against larger, more catastrophic losses, and a claim administrator to adjudicate claims for you, although you are generally more involved in the claims process.
So you have professionals on your team handling those areas. Job one for you is to control your losses. Job two is to control your expenses and make sure you consider the captive’s costs every year, just like you do in your own business.
Why is now a good time to join a captive?
Premiums might be down, but traditional insurance doesn’t return unused loss funding and investment income, and in a typical year, this can still be a substantial sum to leave on the table. Over the long haul for a well-managed business, group captives will lower your total cost of risk and increase control and stability over your risk financing program in this soft market. And when the market cycles up, you will be ready, having insulated your company from the impact of rising rates.
Steven B. Bankes, CPCU, ARM, is managing director of Aon Insurance Managers (USA) Inc. Reach him at (312) 381-5109 or [email protected].
