Companies paying high premiums but having a grasp of potential liabilities are candidates to take on their own insurance responsibilities, usually with guidance from captive consulting experts. The so-called captive assumes a portion of the risk, with the balance distributed to a reinsurance company or similar entity.
The captive consulting company will assess the level of risk that should remain with the company. The balance of the policy goes into the hands of the reinsurance company at a rate that undercuts commercial insurers.
Benefits of Taking on the Responsibility
By insuring itself with the guidance of the captive consulting agent, the company in essence pays premiums to itself and can reap investment income until it has to make payments on claims. Because a reinsurance company typically is more willing than commercial entities to take on certain risks, further cost savings are possible.
There are also tax benefits to the self-insurance strategy. Though taxpayers usually are prohibited from deducting losses from claims until actually writing the check, an insurer may be able to book the loss ahead of time against profits.
Go it Alone or Pool Resources
Captives, which attracted new interest after the Affordable Care Act was passed, can extend beyond a single company. Group captives formed by members of the same industry group or whose potential issues are similar benefit from greater buying power and by sharing administrative costs similar to how municipal governments can come together to provide benefits to employees through a single health insurance plans.
Bring in the Experts
Any entity choosing to pursue a captive insurance strategy is investing its own capital, which has implications for those with an ownership stake. In addition, insurance ventures are subject to strict regulation at multiple levels.
An agency specializing in captive options can tailor a plan that aligns with the long-term goals and map out the least expensive options. They’ll also be well-suited to handle day-to-day operations related to the execution of the strategy.