THE MICRO-CAPTIVE
The Micro-Captive :
What Is It ?
In 1986 , Hawaii became one of the first states in the United States to introduce captive insurance company legislation . Since then , Hawaii has become a leader in regulating captives , with over 220 under license as of June 2017 .
In its simplest form , a captive is a closely held insurance company that insures the risks and exposures of its owners or affiliates . There are many different types of captives , such as single-owner ( also known as “ pure ”), group , association and incorporatedcell . The type of structure you choose is typically driven by what you are hoping to accomplish .
Regardless of structure , captives tend to fall into one of two buckets : smaller captives writing less than $ 2.2 million in premiums ( also known as “ micro-captives ”) and larger captives that write above that amount . In the past , only large companies could afford to own a captive , but now the structure is being used by small- to mid-sized companies too .
Good candidates for establishing a captive insurance company include businesses that :
• want to have better control over their insurance programs , both for property and casualty ( P & C ) and employee benefit coverages ;
• want to provide Enterprise Risk Management ( ERM ) protection using a tax-efficient vehicle ;
• have sufficient business risk to support the premium in the captive ;
• have consistent , free cash flow of at least $ 500,000 per year ; and
• are willing to commit to a long-term strategy to control their risk .
While it ’ s important to align the right candidate with the right captive structure , it ’ s equally important to make sure that the captive is created and managed for the right reasons . For example , with a captive insurance company , you no longer need to rely on the whims of the commercial market with its accompanying market swings and potential policy cancellations . Instead , you manage larger retentions backed by your captive , thereby giving you more control over premiums — with possible savings of 20 – 30 percent or more — along with a potential return on your investment . In a bad year , you can minimize losses with protection through prefunding and reinsurance .
The key to success in the captive market is to only assume reasonable risk with premiums calculated by an independent actuary . You should implement a proper governance structure directed by the captive owner and maintain a conservative and reasonably prudent investment portfolio . Be sure to maintain consistency in your claims guidelines , and don ’ t try to adopt a “ we cover everything ” approach . Finally , locating your captive in a highly credible captive domicile , like Hawaii , is an excellent idea .
The three primary areas of focus for captives include the following :
• Deductible Reimbursement and Difference in Conditions ( DIC ) – Coverage for exclusions , deductibles , and excess protection . Ability to raise deductibles and retentions to retain
BY : JERRY MESSICK CEO , ELEVATE CAPTIVES
greater profit and cut commercial premiums .
• Risk that is too expensive in the commercial market of uninsured exposure – Coverage for key employees , severe weather events , business litigation or interruption , product recalls , crisis management , employee liability and supply chain risk .
• Enterprise Risk Management – Selfgovernance of loss-control programs and ability to shift financial obligations in certain situations .
Captives — if planned and managed properly — can be extremely effective for managing your organization ’ s risk longterm , providing a multitude of benefits . If a catastrophe hits , your captive will have you ready . And if it doesn ’ t hit ? You will have a war chest of savings and sleep a whole lot better at night . +
Jerry Messick has over 32 years of experience in the insurance and alternative risk transfer industry and is a principal and CEO for Elevate Captives . With operations in Arizona , Delaware , Oklahoma , Hawaii and New York , Elevate is a captive consulting and services firm that focuses on multiple industries and trade groups . Prior to becoming CEO of Elevate , Jerry was with a national provider of alternative risk services since 1985 , where he held senior management positions with responsibility for loss control , marketing , finance and captive insurance company operations .
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