Captive Self Insurance for Business Owners Explained

Captive self insurance is a unique and effective way for business owners to manage their risk and save on insurance costs. It allows companies to create their own insurance company to cover specific risks, such as workers' compensation or liability.

A captive self insurance company is typically a subsidiary of the parent company, which means the business owner has more control over the insurance program.

Business owners can benefit from captive self insurance by reducing their insurance premiums and having more flexibility to tailor their insurance coverage to their specific needs.

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Captive self-insurance is a type of alternative risk management that allows organizations to take more control over their insurance program and costs. By forming a captive insurance company, organizations can design customized policies and benefit from underwriting profits that would typically go to a third-party insurance carrier.

Self-insurance and captive self-insurance share some similarities, but captive self-insurance carries less risk than self-insuring. This is because captive insurance companies typically have a third-party administrator or reinsurer to help manage catastrophic losses.

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One of the key benefits of captive self-insurance is the ability to customize policies and benefit from underwriting profits. This can be particularly appealing to organizations that want to take a more active role in managing their insurance program and costs.

However, captive self-insurance also requires significant resources and expertise to manage the program effectively. Organizations will need to dedicate resources to manage day-to-day functions like actuarial services, claims management, legal, and other support services.

Here are some key differences between self-insurance and captive self-insurance:

Captive self insurance can be structured in various ways, each with its own benefits and requirements.

A group captive is a type of captive insurance company owned by multiple organizations that share risks, liabilities, and profits. Group captives can be homogeneous or heterogeneous, and each member's premium is based on its own loss experience.

Group captives allow members to make decisions on underwriting, loss control, operations, reinsurance coverage options, and risk management service providers. Operating expenses for group captives are typically lower due to cost-sharing among members.

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A cell captive is formed by a third-party sponsor who "rents" cells to unrelated companies, with each cell's assets and liabilities segregated from those of other cells. Each cell owner capitalizes its own cell, and cell captives often have lower start-up capital and ongoing costs.

Micro captives, also known as 831(b) captives, make an IRS 831(b) election to be taxed on investment income only, not on premiums collected. This requires collected premium dollars to be below the threshold for the given tax year.

Businesses can use captives to cover lines of business with predictable claim rates, such as workers' compensation. They can also access the reinsurance market to lay off risks they don't want to accept, like product liability.

Companies that consider forming a captive insurance company need to carefully evaluate the feasibility of such a structure. A captive expert advisor can help determine if a captive is a viable solution for the organization.

The first step in forming a captive insurance company is to conduct a feasibility study. This study will help identify whether a captive is the right solution for the company. Captives are not a short-term solution to a company's corporate risk challenges.

To form a captive insurance company, a business plan must be drafted. This plan should outline the company's goals, objectives, and risk management strategies. A captive advisor will lead the captive implementation activities, which include drafting the business plan, selecting service providers, and meeting with domicile regulators.

The following activities are typically involved in captive implementation:

Once the captive is formed, it must be managed appropriately to ensure its success.

A group captive insurance company is owned by multiple organizations that share risks, liabilities, and profits to insure or reinsure the risk of the entire group. This structure makes group captives more accessible to mid-market companies without the time, expertise, or resources to handle vital insurance functions independently.

Group captives can be homogeneous, meaning members are from the same industry, or heterogeneous, meaning members are from different industries. Each member's premium is based on its own loss experience, making it a controllable amount.

Operating expenses for group captives are typically lower than other captive types because the cost is shared among all group members. Members of group captives make decisions for items like underwriting, loss control, operations, reinsurance coverage options, and even risk management service providers.

A group captive insurance company is an insurance company owned and controlled by the companies it insures, allowing mid-market businesses to share risk and collaborate with like-minded organizations as equal shareholders in their own insurance company.

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Companies that are considering forming a captive insurance company need to carefully evaluate their options. They should work with a captive expert advisor to determine if a captive is a viable solution for their organization.

A feasibility study is the first step in determining if a captive is right for a company. This study will help identify the pros and cons of captive ownership and ensure that it is a good fit for the company's specific needs.

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Companies that are ideal candidates for captive ownership share certain characteristics. They have effective risk management strategies and loss control practices, and they are eager to gain more visibility and control over their claims and insurance spending.

Some key characteristics of ideal captive owners include:

Once a company decides to form a captive, the next step is to implement the captive insurance company. This involves drafting a business plan, selecting service providers, and meeting with the domicile regulator.

Working with the right team is crucial when considering captive insurance for your company. A captive advisor will lead the captive implementation activities, including drafting a business plan, selecting service providers, and meeting with domicile regulators.

In the context of group captives, a team of consultants and managers can oversee and administer day-to-day insurance operations, making it more accessible to mid-market companies.

Award-winning Hylant Global Captive Solutions helps organizations explore alternative risk-financing solutions, including captive insurance. If a captive is appropriate, their team customizes a structure and implements, operates, and services the captive-related insurance program throughout its lifecycle.

Most captive management is outsourced to a captive manager located in the jurisdiction that holds the primary license for the captive. In the US, most captive managers are small administrative services providers, but other firms provide a full turnkey service.

Here are some key roles to consider when working with a captive team:

Managing and operating a captive is complex and time-consuming. A qualified captive advisor can coordinate all service providers, liaise with domicile regulators, and perform all financial, underwriting, and corporate administration of the captive.

A company's domicile is essentially its home base, where it's licensed and regulated. This can be a crucial decision when forming a captive insurance company.

Bermuda is the world's leading offshore captive domicile, with over 958 captives licensed as of the last available data. The Cayman Islands is second in terms of the number of captives licensed.

Vermont is home to more captive insurers than any other US state, with nearly 900 licensed captive companies as of August 2009. This is a significant number, and it's likely due to the state's business-friendly environment.

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Some of the top captive domiciles include Bermuda, the Cayman Islands, Vermont, Guernsey, and Luxembourg. These jurisdictions offer a favorable regulatory environment for captive insurance companies.

Here are the top 10 captive domiciles, ranked by the number of captives licensed:

It's worth noting that other jurisdictions, such as Montana and Anguilla, also have a significant number of captives licensed, although they are not listed in the table above.

If you're considering forming a captive insurance company, you're likely a large corporation with a strong financial foundation. Captive insurance companies are often formed by corporations that demonstrate effective risk management strategies and loss control practices, such as Fortune 500 companies.

To determine if a captive is right for you, consider the characteristics of ideal candidates: they're eager to gain more visibility and control over their claims and insurance spending, comfortable assuming more financial risk, and have the capital to fund the captive insurance company properly.

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Companies interested in exploring captive formation should work with a captive expert who can help them determine whether a captive would be in their best interest.

Here are some key characteristics of ideal candidates for captive ownership:

By considering these characteristics and working with a captive expert, you can determine if a captive insurance company is right for your business.