There are lots of folks talking about “captives” in the insurance industry. Although you might have heard of this recently, it’s a concept that we here at Gunn-Mowery have been successfully implementing for over 20 years. So, allow me to briefly explain what they are and how to tell if they’re a good fit for you.
Captives are insurance companies that only sell insurance to their shareholders/owners, hence they are “captive” in who they can sell to and what products they can sell. Business owners set up or join captives to take back ownership of their insurance programs and to control their cost of risk. They are basically a more sophisticated approach than the old mutual insurance companies, which were set up to help insure the risks facing certain industries or communities. In the forties, Fortune 100 companies (oil companies in particular) created captives to insure their own risks rather than buying from a traditional insurance carrier. They tended to go “off shore” to jurisdictions like Bermuda and the Cayman Islands because of the regulatory flexibility they offered. Today, many states have specific captive regulations in order to attract and regulate captive insurance carriers. This means it is just as likely that a captive you look at today may be domiciled in Vermont or Delaware as it could be in the Caymans or Bermuda.
Today, most Fortune 400 companies have their own captives to partially self-fund their own risks. Over the past 25 years, many mid-market companies have banded together and formed group captives to do the same thing. The captive industry is very robust, experienced and financially strong.
The short version—captives are simply a way to take a large expense and turn it into a potential profit center for your company.
You might still be wondering, “Is a captive the right fit for my company?” You might benefit from a captive if your company aligns with the following requirements:
1. Your losses should generally average 40% or less of your annual premiums (although one large claim should not throw you out and can be discounted). If you are spending a lot more in premiums than your insurance carrier is paying out in claims, someone is making a lot of money and it might as well be you.
2. You must be large enough to self-absorb some level of your own claims. We typically suggest you should be spending $100,000 or more for your business insurance.
3. You need to have a culture of safety to make sure you are protecting your employees and your risks.
4. Captives are a long-term play. You should be financially strong and willing to make a lasting commitment to the captive approach.
If you can check off all those boxes, captives can help significantly reduce your cost of risk long term. They can take one of the biggest expenses facing a business and make it a profit center for your firm.
There is a reason so many businesses are joining captives and that is simply because they work. A group of local business owners started NorthStar Insurance 20 years ago and 5 of 7 the original founding members are still engaged. NorthStar has now grown to 27 local businesses and they would all tell you it was a great business decision.
So, to go captive or not to go captive? If you are eligible, “go captive” could be the answer.
Information provided by Brown Schultz Sheridan & Fritz (BSSF) as part of this blog post is intended for reference and information only. As the information is designed solely to provide guidance, and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations, responding to such inquiries does NOT create a professional relationship between BSSF and the reader and should not be interpreted as such.
Although BSSF has made every reasonable effort to ensure that the information provided is accurate, BSSF makes no warranties, expressed or implied, on the information provided. The reader accepts the information as is and assumes all responsibility for the use of such information.
About the Author
Greg Gunn, CIC is the managing partner at Gunn-Mowery, LLC. Greg received his Bachelor’s degree in the dual majors of Quantitative Business Analysis and Finance from Penn State University. At Gunn-Mowery, Greg manages overall operations with specific responsibilities for the commercial and administrative departments, as well as acquisitions. Greg also provides risk/insurance management and employee benefit support for many spectacular mid-market clients.
Greg is currently Pennsylvania’s director for the national trade association, Independent Insurance Agents and Brokers of America. Greg was recently named to Insurance Business America’s 2017 Hot 100 list and was previously named 2013 Executive of the Year by the Central Penn Business Journal.