Traditional insurance is not for everyone. While countless business owners benefit from having access to traditional insurance, others prefer to maintain greater control over the policies they choose. What is captive insurance, exactly? It is a type of self-insurance that offers more flexibility than common fully insured plans. Businesses can customize their health plans to meet the unique needs.
Captives are not new by any means, having first made their debut in the United States in the late 1950s. However, up until recently establishing a captive was reserved for the larger Fortune 500 companies. Today, many types of businesses choose to take part in a captive arrangement. This leads to increasing the control of cash flow, saving money on risk management tools, and creating a better claims management process that lowers insurance costs and more customized coverage that is not readily available in traditional fully insured plans.
What Sets Captive Insurance Apart?
While there is no one-size-fits-all approach to reducing health care costs, captive insurance can be useful for businesses that want more control over how insurance claims are handled. A “captive insurer” is defined as an insurance company that is entirely owned and controlled by its insureds.
Captives generally face less regulation and provide businesses with the opportunity to personalize their health care plans to meet their individual business needs. Companies can also save money by establishing a captive because they are paying only for the health care expenses of their employees. Whatever funds are left at the end of the year can be put toward other business expenses.
There are multiple types of captives that businesses can create, starting with single-parent or “pure” captives. This is the most common type. Other captive options include group captives, rental captives and association captives. Group captives are operated by several companies that have similar businesses and loss exposures. Rental captives are used by non-owner companies for a fee. Association captives are established by professional or trade associations to insure similar businesses.
Owned by Insureds
A captive insurance company is a business that has been specifically created to insure the risks of an affiliate business. These insurance companies work in a similar way as conventional insurance companies with just a few distinctions. Business owners, often referred to as insureds, pay premiums to the captive insurance company.
Captive insurance companies are highly regulated and can be found both onshore and offshore. The insureds that use captive insurance choose to put their own capital at risk to create an insurance company and work outside of the commercial insurance marketplace. This is often done so that insureds can achieve risk financing objectives.
Works Outside of Commercial Insurance Market
When insureds choose to get involved with captive insurance, they must understand that they are putting their own capital at risk. Insureds operate outside of the conventional commercial insurance marketplace, which is regulated at a state and federal level. Traditional insurance regulations are designed to provide the insured with protection from the insurer. These regulations can be costly to implement and monitor, resulting in frequent failures.
As captive insurers are individual businesses, they often have less capital than a commercial insurance company would have. They also have fewer protections and face certain risks involved in using their own capital instead of paying to use the capital of a commercial insurance company. However, many businesses that have self-insurance believe that the risks are worth the rewards.
Insures Risk for Owners
An insured who chooses to buy captive insurance must also be willing to invest its resources. Insureds involved in captive insurance companies have ownership of the captive and can, therefore, maintain control over it. In addition, insureds can benefit financially. Policyholders are entitled to certain dividends if a company should make a profit.
While there are many benefits to establishing a captive, this is not the right choice for everyone. A captive insurance company may be beneficial to your organization if you are financially stable, have good risk management practices in place, are able to make a long-term commitment to using captive insurance, and have the ability to financially plan in a strategic manner.
Learn More from BenefitCorp
There are just a few steps involved in determining whether your company is a good candidate for a captive. First, you will need to select the right consultant with the expertise you will need in order to determine what type of captive will best meet your needs, such as single-parent captive, rental captive, or association captive. Next, you will want your consultant to assess the needs of your company. The right strategist will be able to help maximize your company’s return on its investment.
Want to learn more about captive insurance? The insurance experts at BenefitCorp can help. Call BenefitCorp today to see how our experienced insurance consultants can help you choose the best health insurance model for your business.