By Fred Turner
As our country celebrates its independence this month, many mid-sized companies are liberating themselves from the traditional risk management model offered by commercial carriers by supplementing that model with a captive insurance company. These companies are filling gaps in coverage, taking more control over the claims process to better control losses. Business leaders, looking for custom insurance coverage, sought out alternative risk insurance that offered more control and cost containment in the form of captives.
Captive Insurance Catches On with Companies
Conceptually, captive insurance is set up as a wholly owned subsidiary of the parent company and is capitalized and domiciled in a jurisdiction with enabling legislation. The captive is licensed to insure risks of companies owned by or affiliated with the shareholder of the captive. For example, Mr. Smith owns twelve entities that own real estate located in diverse locations along the Gulf Coast. He has commercial wind coverage but the carrier requires a large retention, five percent of the value of the buildings. Mr. Smith could set up a captive to cover wind losses within that retention.
While relatively new to the small and medium size market, the Fortune 1500 has long been utilizing captives.
The 5 Steps in Starting a Captive
There are many different ways to set-up captive insurance coverage and it is best to work with an expert to cover all of your options. We have detailed the Captive Formation Process on our Website and here are some of the things to consider when starting a captive:
- Design Analysis – This is a two-part process that identifies the threats and costs associated with those risks as well as how a captive could potentially be structured for your business operation.
- Feasibility Study – Depending upon the type of business you are in, your risks may vary, and so should your costs. At Active Captive Management, we work with clients to create risk management assessments and feasibility studies to give our clients a clear picture of how a captive will perform. We also go into the different types of captives and recommend which one would work best.
- Captive Application Process – Making a domicile choice is critical and part of the assessments and feasibility studies we conduct for our clients. Domicile comparison is critical in settling on where to locate your captive and applying for your captive.
- Implementation – There are several ways to structure a captive and setting one up will be related to the type of coverage needed by your company, what traditional coverage is offered and whether you feel you can better manage the risk than those companies providing coverage.
- Captive Management – Much like you run your business, a captive must include the identification of a manager, lines of coverage, premiums, limits, deductibles and operating budgets. Captive regulatory compliance is needed as well as timely reporting and ongoing assessments of the captive’s performance.
There are many benefits to forming captives, but also some misconceptions and risks associated with these alternative insurance solutions if you aren’t working proven captive insurance. Get started with a complimentary Risk Analysis to see if captive insurance can help you gain freedom from inflexible traditional insurance and allow you to better control your company’s risk.
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