If you are like many heavy contractors, you hate the insurance renewal process and you rely on your agent (most likely a close friend) to get you the best rates while hopefully providing loss control services to drive down claims resulting in lower insurance costs. Yet you continue to deal with yearly issues at renewal time when insurance carriers tell you that your rates are increasing not because of your claim history but because of your risk sensitive industry. As a successful business owner, you would probably find comfort in knowing that you have a fighting chance in the traditional insurance market. Unfortunately many contractors don’t. With a possible hard market (rising insurance rates) in the future and an increasing amount of claims being denied by carriers, it is not hard to see that all of the control is held by the insurance carrier and very little by the consumer.
If you have not looked into alternative insurance programs, you are already among the minority. While there are many options available, more and more mid- to large-size contractors are deciding to move into captive insurance programs to control their insurance destiny. Fortune 500 companies have known for many years that these programs tend to be the best risk financing options that allow businesses to take control of their risk, and in exchange, profit from that risk. If you are consistently top of class for your industry in size, financial stability, and claims, a captive program is likely right for you.
There are many types of captive programs that are available, although unless you are a Fortune 500 company that has the finances to take on larger risk, “group captives” tend to be more conservative and less risk adverse. A group captive program allows you to join like-minded companies to increase control, build buying power, and share risk among members. In short, a group captive program is insurance that is owned and controlled by its members.
Group captive programs can be held onshore or offshore, and depending where the domicile (location) is there will inevitably be different advantages based on the location’s regulations. While onshore captives have become more common over the last few years, the most popular location for group captives continues to be places like Bermuda and the Cayman Islands. These offshore locations have well-developed insurance infrastructures along with an absence of local income or other taxes in the domicile.
Key benefits of group captive programs include long-term control, enhanced claims management, upfront savings, and potential for significant returns plus investment income. Every organization has dealt with a claim that they felt was fraudulent yet was settled and paid by the insurance carrier for reasons that benefit the carrier. You may have also not been notified that the same claim was settled for such a high dollar amount. These issues become much less common, as you will be informed of any claim that is posted to your program and you have the ability to fight claims you feel are fraudulent and/or settle claims you agree with. All loss funds (premium dollars) not used to pay claims result in returned premiums plus investment income. With this ability to see significant returns of your insurance premium dollars, business owners typically become creative deciding where this money will go. Whatever the strategy, it is highly recommended that you consult with your accountant or tax consultant on the best strategies.
Captive programs can benefit many organizations but the reality is they are not for everyone. Companies that have below-average loss control strategies and that experience high claim numbers will not be accepted and would also experience too much risk to enjoy the benefits. While the traditional insurance market has many disadvantages and will always dictate your destiny, companies with less-than-desirable claims results have few other options to insure their risk.
The big question is finding out if a captive program is right for your organization. Chances are if your current agent has not told you about a captive program, he or she does not have the capability to provide one or does not have adequate captive knowledge, if this is the case, find an agent that does. Your advisor will put you through a feasibility study to determine if you are a good captive prospect or if you need to implement strategies to improve controls that will allow you to enjoy the benefits of these programs in the future. Loss control now becomes more important than ever, as these services were primarily for the benefit of the insurance companies and now will become a unique opportunity for you to build better loss experience results and higher profits.
Every business owner would like to save on taxes and put more money into the bank account. A captive program provides a unique opportunity to do both. As you research this topic, you may become overwhelmed by the amount of different captive programs that are available, and underwhelmed by the amount of information on their differences. It is not difficult information to process as long as you align yourself with an experienced captive advisor and an accountant with captive knowledge.
With a changing landscape in our economy and with more and more regulation being placed on the insurance market, it will continue to become more important for organizations to be aware of alternative insurance options. Instead of dealing with brokers who turn your insurance into a commodity, you can take control of your program and, in turn, reap the benefits.
