Risk & Business Magazine Spectrum Insurance Magazine Fall 2018 | Page 25
THE ABCS OF CAPTIVE INSURANCE
THE
BY: DAN O’NEIL,
VICE PRESIDENT OF TRANSPORTATION
AT SPECTRUM INSURANCE GROUP
W
hat is captive
insurance and
is it a good idea
for your workers’
compensation
coverage? Captives are formed by
companies as subsidiaries whose
sole purpose is to insure the risks
of their corporate parents. They are
especially useful in situations where
conventional insurance that meets
your unique needs is unavailable or the
price is exorbitant due to the degree of
risk involved. A captive allows you to
essentially pay insurance premiums to
your own corporate structure rather
than an outside carrier, garnering the
opportunity to profit from your captive’s
investments.
Although captive insurance companies
have been around since the 1980s,
they have mostly been used by large
companies that could afford to take on
the risk. More recently, however, the
structure has been implemented by
small- to mid-sized companies too. Good
candidates for establishing a captive
insurance company include businesses
that:
• want better control over their workers’
comp programs, with more streamlined
administration and faster turnaround
times;
• have sufficient business risk to support
the premiums;
• have consistent, free cash flow of at least
ABC s
OF CAPTIVE INSURANCE
$500,000 per year; and are willing to
commit to a long-term strategy to control
their risk.
While captive insurance premiums are
tax deductible, the IRS has cracked down
sharply on businesses using their captive
insurance companies as tax shelters, and
they have fallen out of favor with some
business owners. Yet when established
and reported properly, they can be a
great idea for workers comp insurance
plans.
With a captive insurance company,
businesses no longer need to rely on
the whims of the commercial market
with its accompanying volatility and
threat of policy cancellations. By
managing larger retentions backed by
your captive, you can achieve potential
premium savings of 20 percent or more,
along with a potential return on your
investment from funds otherwise paid
to an insurance carrier. In a down 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 RECEPTIVE CAPTIVE
DOMICILE CAN BE HELPFUL
AS INDIVIDUAL STATES CAN
VARY ON THIS ISSUE.
One of the best features of captive insur-
ance is the fact that you have control. If a
valued worker is awaiting compensation
following an injury, you can ensure that
he or she is kept on track toward recovery
with timely reimbursements, rehabilita-
tion program approvals, and other medical
allowances. If a “worst case” catastrophe
hits, you can be sure you’re ready and
staffed appropriately to handle your needs.
Talk to your insurance agent about
whether a captive insurance structure
may make sense for your business. The
agent can guide you toward a solution that
makes sense, given your company’s risk
tolerance level and financial situation. +
25