For most business owners, insurance is simply another annual expense. However, companies that choose self-insurance or captive insurance have the chance to turn a common expense into a potential profit. While there are some similarities between self-insurance and captive insurance, there are also distinct differences.
A group captive is a type of insurance company that is completely owned and operated by its shareholders. These shareholders generally consist of similar-sized companies that come together to form a small insurance company. Captives then purchase reinsurance to protect against large losses and provide necessary policy forms.
While captives have been getting a lot of attention lately, they are not new. There are more than 7,000 captives today as more business owners choose to leave behind the traditional insurance marketplace in an attempt to gain more control over their insurance program.
What Is Self-Insurance?
Self-insurance occurs when a person or business does not obtain insurance from a third-party but rather accepts liability for certain risks, such as health costs. Instead of relying on the insurance company to pay your employees’ medical, vision and dental claims, you would be responsible for paying these claims. A third-party administrator may be used to process the claims on your behalf. In exchange for accepting these risks, the business owner would not have to pay the insurance company and that money stays in the budget. Being self-insured allows businesses to obtain cost savings and maintain greater control over their insurance plan.
Similarities Between the Two
Self-insurance is a general term that is used to describe a form of funding that has been set aside by employers for future funding. It can also refer to a more sophisticated financial arrangement known as captive insurance. Captive is a form of self-insurance where a business owner forms their own bona fide insurance company in an attempt to fund losses. In both self-insurance and captive insurance, the owner of the insurance is taking on a variety of risks that could potentially result in financial ruin if the business owner does not take the necessary precautions.
Protection Against Financial Loss
There are many reasons why some business owners choose to make the switch from traditional insurance to self-insurance or captive insurance. With self-insurance, employers have the opportunity to customize their health plan to meet the specific needs of their employees. Business owners can also maintain greater control over money that is placed in the reserve account that would otherwise be spent on insurance premiums. Self-insurance enables businesses to control costs by reducing or avoiding state and federal health insurance premium fees and taxes. Most business owners who are interested in self-insurance or captive insurance are highly dedicated to preserving their healthy work force and want to offer the best benefits possible.
Where Captive Insurance Differs
Captive insurance is not a solution to all of your insurance problems. However, it can be a viable option for businesses that want to be more in control over their financial losses. Unlike traditional insurance where you simply write a check to the insurance company, you will be able to see all of the unique components that make up a premium. You will also get a say in the pricing and delivery of your plan. This is known as “unbundling.” To be a cost-effective solution, a captive must be structured in a specific way as to allow for the building of profits instead of unwanted expenses. To achieve this, you must finance more than just smaller risks.
Formal Arrangement Owned by Insureds
Captive insurance companies have remained a popular risk management tool for large companies for years. However, larger corporations are not the only ones that can benefit from forming a captive. Small- and medium-sized firms can also realize the benefits of small captives to fund insurable risks. By creating their own formal insurance arrangement, businesses in all industries can protect against catastrophic losses and create a nest egg for future claims. Captive insurers also have the option to buy reinsurance, which provides these businesses with an additional layer of protection by reinsuring losses that come in above a specific attachment point.
Speak to the Experts at BenefitCorp
While self-insurance and captive insurance are not right for everyone, they can be a solid solution for certain businesses. The primary goal behind captives is to encourage forward-thinking businesses to become less dependent on the traditional insurance marketplace and take advantage of the benefits that captives deliver. However, it is also important to be aware of the risks involved and to work with an experienced insurance consultant to ensure that you are doing everything right. To learn more about the differences between self-insurance and captive insurance, or for help acquiring a policy for your business, reach out to the insurance experts at BenefitCorp.