Risk Management · July 01, 2021

What to Know About Captive Insurance Versus Traditional Coverage

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.

Any business can form a single-parent captive insurance company, which means you're going it alone. Alternatively, there's the option to join an existing entity, such as a group captive formed by a partnership of similar businesses or an association captive that's usually owned and managed by a professional organization.

Here's what you need to consider when deciding if one of these captive insurance options is right for you.

The benefits

Choosing to go the captive route has several benefits. If you operate a high-risk business, such as performing functions that could cause injury, death or significant property damage, you may not be able to obtain traditional insurance. Captive insurance may be an option, and it can be customized to your unique risk.

Another advantage is you have more control. Because you own your plan, you may choose your terms of coverage, tailoring your benefits to match your business risks and employee needs. You'll no longer be at the whim of an insurance company that may change policies and limits, eliminate the coverage your employees value or raise rates.

You also have more transparency when you own a captive. Your company can analyze claims and use the insights to improve performance and manage risk. This ensures you're offering the right type of care for your team.

But perhaps the best perk for captive is reducing your overhead. While the start-up costs are more expensive at the onset, you have the potential to lower your insurance premiums once the plan is in place. And if claims are low, you get to keep the profits, instead of the insurance company. You'll be purchasing insurance in the wholesale market rather than retail, which eliminates the middleman and reduces the price.

Potential downsides

While the perks sound good, this type of insurance does have potential pitfalls. Starting it can be expensive. You may incur costs at the beginning, including formation and legal fees. Depending on the size of your business, you may also need to hire an employee to handle the plan or outsource operations to a third-party captive manager. This means you may need to be more careful with your overall cost management plan.

Another con is that you'll now need to mitigate your own risk, which means having enough money to fund potential losses. If you have excessive claims in a year, you'll need money to cover those costs, which puts your capital at risk.

You'll also be responsible for the day-to-day management of the plan. Traditional insurers have experience creating and servicing insurance products. If you don't have someone on your team who's responsible for handling claims and answering employee questions, the quality of your benefits may suffer.

Is captive insurance right for you?

As insurance premiums rise, the captive market is becoming more attractive to business owners. But it's not the best solution for everyone.

If your company engages in high-risk operations, and you're unable to qualify for traditional insurance or your rates are sky-high, a captive plan may be a good solution. Additionally, if your company experiences a low level of claims each year, self-insuring may make sense and reduce your premiums.

Be sure to weigh the advantages and disadvantages to make the right decision for your business. Your employees count on you to provide them with good insurance packages. When you offer a plan that fits your employees' needs and your business objectives, you've found a win-win for your benefits program.


Financial insights for your business

No results found

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.

Links to third-party websites may have a privacy policy different from First Citizens Bank and may provide less security than this website. First Citizens Bank and its affiliates are not responsible for the products, services and content on any third-party website.