Consumer spending, the lifeblood of the retail industry, is depressed in today’s business climate. Job growth is anemic, and revenue projections are difficult, at best.
As a result, many retailers are seeking to control cost and increase revenue, and one way to achieve those goals is by creating a captive insurance company, says Len Churnetski, regional practice leader of Aon Risk Services’ retail division.
“Historically, companies purchased insurance and paid a premium,” Churnetski says. “Many insurance buyers have asked, ‘Was that a cost-efficient use of our capital? Should we have kept that risk for our own account?’ Instead of putting it on their books as an ongoing business expense, a company could have a formal captive insurance program underwrite that risk that it decided to keep for its own account.”
Smart Business spoke with Churnetski and Jennifer Bell, regional managing director, chief operating officer, Ohio-Indiana-Kentucky, Aon Risk Solutions Northeast Inc., about how captive insurance companies can help retailers, as well as those in other industries, control costs.
What is a captive insurance company?
There are two types of captive insurance companies. The first one is a single-parent captive insurance company. This is a closely held insurance company that is owned by a single entity whose insurance business is primarily supplied and controlled by its owner. It exists primarily to underwrite the risk of its parent and its affiliated companies. That single-parent captive may or may not elect to underwrite the risks of its customers, suppliers, employees and/or unrelated entities.
The other type is a group captive insurance company, which is organized on the basis of multi-ownership or multi-insured in the captive, all different entities. They might have a similar risk, for example, they might be a homogenous group of companies, perhaps all in the same field, and they want to pool their risk together in the form of a captive insurance company to underwrite that particular risk within their group.
Why would a retailer want to form a captive insurance company?
Major retailers know they are going to have a lot of workers’ compensation claims, property claims and customer slip and falls on their premises. They realize that is a part of their cost and to a certain degree they should retain some of that risk for their own account and just pay those losses. In many cases, retailers keep some of that risk for their own account in the form of a deductible or self insurance, but they all purchase some type of insurance above that to protect them from catastrophic losses. A captive insurance company can be an excellent mechanism for keeping some of that risk below what is deemed catastrophic.
