From An Actuary
This edition of The Actuarial View discusses the growing interest in captive insurance companies among business owners. Along with health care reform, recent additions to Delaware's captive insurance law have made owning a captive both easier and more attractive. Recently Governor Markell signed into law an amendment which establishes the framework for "branch" and "agency" captive insurance companies.
Branch captives are typically used by off-shore captives to underwrite self-insured employee benefit programs under ERISA. In addition to employee benefit programs, the new law permits branch captives to write additional lines of business including property and casualty coverages. Agency captives are usually used by insurance agencies or brokers to provide coverages and risk protection for client-managed business.
This article covers many of the advantages available to business owners that have their own insurance captive. If you'd like to learn more or would like to assess the feasibility of having your own captive, please reach out to us. We'd be happy to help.
Tim Luedtke, FSA, MAAA, CFA
Diane Luedtke, FSA
You Are Your Own Boss . . . You Take The Risk . . . Now Protect Your Business And Be Rewarded
Freedom - Captives provide the business owner with much greater flexibility in how to manage their business risks. With an owned captive, the business owner has a ready outlet for addressing their insurance needs when the traditional insurance outlets become tight with higher insurance premiums and reduced coverage availability. Even when the market is difficult, the business owner will have access to insurance. While the business owner may still need to pay market premiums, any "excess profits" built into the premium will be retained in the captive insurance company and ultimately by the owner.
Access To Greater Insurance Capacity - By owning an insurance company, the business owner gains access not only to direct insurance writers, but also to reinsurers and surplus lines carriers that were previously unavailable. Such access fosters increased competition and ultimately an improved, more accurate premium pricing mechanism.
Access To Professional Advisers - A captive insurance company must comply with the insurance regulations of the domicile government (country, state, etc.) where it is established. To effectively meet these requirements, a disciplined framework is followed to measure, monitor, and price the risks accepted by the captive. Such discipline is instilled through the assistance of professional advisers, the captive's reinsurers, and meeting the domicile's regulatory capitalization and reserving requirements.
Reward Those Following Best Practice - Any successful insurance company succeeds because it is able to attract sufficient numbers of good risks to offset any losses suffered from the bad risks. Characteristically good risks follow risk management practices that represent industry best practice. For those in the medical/dental profession such practices would include: continual learning, following standards of care, keeping good medical records, and practicing confidentiality on a need to know basis. Where one owns their own captive, the benefits associated with a business owner's process improvement and lowered claim costs are retained by the captive and directly reward the owner, rather than being shared.
Lower Costs - Direct rewards associated with owning a captive include: reduced premiums for those having lower claims, lower premium taxes, reduced premiums due to lower insurer profit margins (captives generally have lower capital requirements versus traditional insurers), and access to more competitors. Additionally, where captives are utilized to insure an employer's employee health plan, the employer can realize lower costs by eliminating any state mandate requirements by utilizing the ERISA preemption available to self-funded plans.
Strengthen The Supply Chain - Captives may be used by a business owner to insure third-party risks. While generally a riskier proposition than insuring one's own risks, insuring third-party risks may be attractive where the business owner is intimately familiar with the third-party. For example, if a manufacturer has a long-standing business relationship with a component supplier known to establish and follow best industry practices, the manufacturer may wish to insure some aspects of the component supplier's business.
Should you or one of your clients wish to consider a captive insurance option, they should: