Group Captive Insurance Pros and Cons Health Insurance Captives

British Petroleum is not alone in this practice—indeed, most Fortune 500 companies today have captive insurance subsidiaries. If you’re tired of your insurance premiums going up, and your business has built up some cash reserves, you may consider captive insurance. Unlike traditional insurance, which is purchased from a third-party insurer, captive is a form of self-insurance. Under this arrangement, your company creates a subsidiary of itself that writes and covers its own insurance policies. There are many significant advantages to captive insurance ownership, but what are the downsides?

In a perfect world, “going captive” provides a path of growth for entities that has reduced costs and risks compared to insuring actions through third-party providers. At the same time, losses are still covered, dividends can be declared, and surplus positions can create real profits that disadvantages of captive insurance still grow in a tax advantaged way. There can be several barriers to entry compared to what is available from policies that are on the open market. For those seeking to leave captive insurance, the same barriers to exit are in place to prevent unwanted changes to the insured pool.

You may be able to access coverage that might otherwise be unavailable or overly expensive to obtain. Traditional group health plans are created and controlled by a third party that shoulders all of the risk. When you join this plan and pay your premium and deductible, covered risks will be paid out on your behalf. To help you make the most informed choice for your business and its employees, let’s review the pros and cons of a captive insurance option. This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.

  1. If structured incorrectly or implemented for the wrong reasons, they can become a costly exercise in futility for the parent company.
  2. What makes sense for one organization may not work for another, and this is certainly true when it comes to captive insurance ownership.
  3. In many instances, the parent company may push its captive agents to sell certain policies or meet certain sales quotas, oftentimes not being the best product for the customer.
  4. What makes sense for one organization may not work
    for another, and this is certainly true when it comes to captives.
  5. Companies that use them generally rely on conventional commercial insurers to protect against certain risks.
  6. Such costs may be offset by contracting
    out administration to captive management companies.

What makes sense for one organization may not work
for another, and this is certainly true when it comes to captives. Whether a captive is right
for you or not, it is important to call upon industry experts—whether they be consultants,
actuaries, or attorneys—to help guide you. Depending on the risk involved, a wide range of sophisticated,
analytical tools can be employed to help calculate IBNR (incurred but not reported) losses. On a
day-to-day basis, simple spreadsheets can be maintained and used. Before you jump in, or shy away from, taking the captive route, do your due diligence and read
about the most noteworthy pros and cons involved, outlined below. This website is using a security service to protect itself from online attacks.

That means total costs can vary greatly each year, making it difficult to budget for actual insurance needs. Many who use captive insurance find a need to have a secondary policy that can cover unanticipated expenses. Because captive insurance is wholly owned, the policy holders control how loss funds are dispositioned until they are paid out. The same applies to investment income that comes from loss reserves. Some cell captives may even provide a guaranteed rate of return to its policy holders. There are guarantees that involve a range of return rates as well.

Additional time, money, personnel, and
management commitment are required for these services. Such costs may be offset by contracting
out administration to captive management companies. However, these costs will reduce the premium
savings expected in comparison to conventional insurance companies. To keep costs down, the available risk is spread out through large groups of people so that an adequate level of protection can be achieved. Under captive insurance arrangements, the pools that are available to insured individuals are often very small.

Protection for the Business

Corporations with self-insured risks within captive programs face unique challenges. PwC’s risk modeling services team understands these unique risks, and can help to turn them into opportunities. Because the entity is essentially self-insured, it needs to raise a substantial amount of capital to keep in reserve to pay for claims. If the entity underestimates its need for protection, or experiences a catastrophic loss, it may not have the funds on hand to provide adequate coverage. This could have a severe impact on the company’s bottom line if it needs to draw from other assets. That’s why a growing number of companies are replacing traditional employee health insurance plans with captive insurance solutions, which can provide myriad advantages.

I’m Interested in Captives—How do I Join?

The goal of this type of insurance is that it insures the risks of the owners. Those who are insured are able to benefit from the underwriting profits that are collected. Where the insured enjoys a stable and reasonable loss experience from year to year, a captive
affords the ability to price insurance coverage accordingly. By contrast, the conventional
insurance market will often set prices in relation to broad industry classifications and thereby
fail to reflect key differences in loss experience among individual insureds.

The Disadvantages of Captive Insurance

The captive business can provide a secured loan to the operating company without the same profit motive of other third-party providers. Even if a claim is approved, the process may take several weeks (if not several months) to complete. Because of the structures involved, business owners have control over their claims process, which eliminates the chances of a denial. Fraud is eliminated because one cannot commit fraud against themselves.

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Among these is an ability to analyze historical claims information. When
feasibility studies are undertaken, it is not uncommon to find that precaptive loss experience
is unreliable. Under the correct conditions, however, it can still be an effective way to diversify and manage risk. Some drawbacks to being a captive agent are that you are tied to cumbersome contracts and have obligations to the insurance company that you work for, often tying your hands in how you can conduct business. Captive agents often excel at providing an exceptional level of service to their clients. This is so because they have the freedom to spend more time on relationship building, fact-finding, and customer service.

Ability To Customize Insurance Programs

That means the captive benefits, the policy holders benefit, and everyone can become financially secure. Although this benefit is usually reserved for non-fronted captive insurance, it does apply to the industry as a whole. That means the form of the insurance and the rates involved are much more flexible during the underwriting process. Although rates are usually dictated by the market, especially during the start of a formalized risk finance program, changes can be made as policy holders generate a specific loss experience. Over time, non-fronted captives provide opportunities to create their own rates and forms.

Reduction of the Costs of Risk Management

While policyholders own the captive insurer, their ownership interest is not an investment in the true sense of the word. Ownership ceases when insurance lapses, such as when the business owner no longer needs coverage and stops paying for it. Insurance is based on spreading the risk among large numbers of individuals as a way to keep costs down. With a captive arrangement, the pool of insured individuals is often small, which means the actual costs can vary greatly from year to year.

With a captive, the insured–that is, the captive owner—puts up collateral to ensure that the captive can handle unexpected claims in the first few years. If claims happen to be higher than expected and the collateral has to be used to keep the captive solvent, then additional capital will be required. There isn’t a high probability of this happening, but it can happen. A captive has
complete freedom to insure any risk it chooses and to customize the terms and conditions of its
policies. This can lead to improved loss control efficiency and promote greater awareness of the
factors that commonly give rise to losses. Captive insurance requires more resources and time, which contributes to its higher overall cost.

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