One area many are exploring for the first time is the concept of being part of a captive - a potential avenue for gaining more control over your healthcare and, at times, your liability costs.
Captives can be difficult to understand, and if you’re like many business leaders, you may not know enough about them to evaluate their pros and cons. Let us help you.
What is a Captive?
A captive is an insurance company that is owned and controlled by those that it insures. Captive owners or "insureds" in these arrangements benefit from greater control and transparency. Unlike the traditional insurance marketplace, captives allow businesses to achieve their risk financing objectives in a vastly different way. In essence, it’s an unbundling of a traditional insurance company and the creation of your own.
Captives can resemble a mutual insurance company in that they are both owned by their insureds with two significant differences:
1) Captive owners are placing their own money at risk.
2) Captive owners have a lot more control over how their program is set up and managed.
Captives have both benefits and challenges.
What are the Benefits of Captives?
Captives may allow for lower overall insurance costs. Because you are taking on the risk, there is the ability to create more long-term funding stability if you manage your risk well.
You’ll have more flexibility in setting premiums, designing coverage options, and risk retention. You retain greater control over what you cover and how you cover it.
Because captive insurance strategies can provide a financial reward for controlling losses, there is typically a higher level of emphasis on safety and other forms of loss control. From a corporate perspective, there’s obviously an extra incentive to improve safety policies and procedures to minimize any claims. This mindset can really stimulate creative ways to incentivize managers and staff to do everything under their control to minimize claims.
When employees understand that their actions and choices have an effect on their company's bottom line, they tend to be more engaged, hence improving culture and morale.
What are the Potential Challenges with Captives?
While captives do provide many benefits, there are also some challenges you need to be aware of. The biggest one is the additional program administration and commitment needed to make them successful. It takes time, knowledge, expertise, and a great agency partner familiar with captives to help administer the program. If claims management isn't handled appropriately, for example, it can cause significant problems. You can’t afford to mismanage many of these hidden cost drivers or they can come back to bite you in the end.
Because you are responsible for the operation of the captive along with the other members, the quality outcomes and performance are dependent on the effort you put towards it. In most cases, it will work better to use a third-party administrator that specializes in captives. An experienced agency captive manager is there to help guide the members with those critical decisions.
At times there can be significant capital investments to get started in a captive. The possibility of incurring unexpected losses is there, so it's essential to understand the risks you are about to take and the company's ability to fund it.
If a merger or acquisition is on the horizon for your business, captives can sometimes create hurdles for moving forward and transitioning. Captives can be difficult to enter and exit depending on what’s available in the open insurance market. You’ll want to partner with someone that understands all of these factors.
Is a Captive Right for You?
Is a captive the right solution for you? Good question.
The bottom line is…a solid maybe! Your company may not be ready for the jump to a captive.
It’s important to evaluate and explore the possibilities with your eyes wide open. When it comes to captives, many clients jump in without realizing the time, energy, and effort it takes to be in a captive, resulting in a poor or very costly experience.
A captive can be an invaluable planning tool for the right business with an entrepreneurial mindset. The team at Winter-Dent is an expert on captives and experts on assessing your company’s ability and readiness to take on such risk. If a captive isn’t for you, we can customize many other programs that will help you hit your goals and possibly prepare you for a step like this down the road.
Our goal is simple: we give you the information you need to make solid business decisions and help design the best strategy for you. It’s the difference between selling and consulting.
Contact Winter-Dent today for all of your risk management, insurance, employee benefits, and financial service needs. Please tell us where you want to go with your business and personal future and we will work with you to help design a strategy to get you there.
Originally posted 12/16/20 - Updated 3/27/23