Need more flexibility in your business insurance? Do it yourself.
Every business owner wants to feel secure and in control. While traditional insurance offers plenty of security, it sometimes lacks the flexibility to adapt to the nuanced and changing needs of some businesses.
For that reason, captive insurance is gaining popularity with companies of all sizes and across many industries. It essentially gives you as a business owner the ability to insure yourself, meaning you control both sides of the process. You’re both the insurer and the insured.
How does it work?
First, you start a captive insurance company. It needs to be registered with the state just like any other insurance company, and you’ll need an initial investment to get it started.
That company issues policies to your business, and you pay the premiums and file claims just like you would for traditional insurance. You can use it to insure your business broadly or cover specific aspects of it. You can also use it for health benefits, workers’ comp insurance and other employee-related needs.
Why use captive insurance instead of traditional insurance?
Traditional coverage, bought from an outside insurance company, is certainly a lot easier, and it can cover more needs. But captive insurance comes with several advantages, depending on your goals.
- For starters, you are in control of what to insure and how the policies are written. That means:
- You can fill gaps in coverage that traditional insurance won’t. This allows you to formally insure risk that you might normally have to pay from out of emergency savings or reserves.
- You can insure special needs that may be too expensive or risky for most insurance companies, like major projects and investments, cyber security breaches, loss of income from a major business interruption or regulatory changes.
- You set the deductibles, which can reduce the cost of your premiums.
- If the captive insurance company turns a profit, it can go to the owner, which is you.
- It’s well suited for companies that pay high amounts into business or employee coverage.
- For businesses with at least 50 employees, self-funded employee healthcare plans can help companies save money on premiums.
Is it hard to do?
Captive insurance takes more work that just calling up your agent and getting a quote, but it’s not as difficult as it might seem. A trusted financial advisor, along with a captive insurance management advisor, can help you from start to finish. They can handle the paperwork, take care of registration with the state and even help finance the initial investment. If their bank has trust and investment services, they can also help you get a trustee and manage the company’s investments.
You can start one of two types of captive insurance companies:
Group Captive
This means you form a captive insurance company in partnership with other businesses. You and your partners combine your buying power and the premiums you pay to negotiate greater control and terms for coverage. It can be a great option for businesses paying at least $250,000 (and up to $1 million) in annual insurance premiums between their workers’ comp, general liability, and auto coverage. And because you’re starting the company with partners, it requires a smaller initial investment.
Pure, or “Single Parent” Captive
This is when you own the captive insurance company without partners. It’s typically used by organizations to replace lines of insurance completely. It gives more control over the claims process and coverage terms, and all the underwriting profit goes to you. This option is suited for businesses that pay premiums of anywhere from $350,000 to hundreds of millions of dollars. Due to the potential size of these insurance companies, they often can require more of an initial investment than a group captive.
Captive insurance is a complex topic, and it can be adapted and customized to fit almost any need. Ultimately, it all depends on your business and what you want to cover.
Tom Blanchard is a financial advisor based at Pinnacle’s Farragut office in Knoxville, TN. He can be reached by phone at 865-602-3648 or by email at Tom.Blanchard@pnfp.com.